Fed chair Jerome Powell has a big decision to make

A question of US government obligations (government debt) this week was accepted with a warm question.

Perhaps bond investors have rethought the state of the “safe paradise” of the market. A use of the US dollar in the aftermath of the announcement of the Trump rates suggests that they could move the looks and funds, to other markets such as Japan, Germany and Switzerland.

They could also have an eye on the “Big Bill, Bill, the bill of the Republicans who makes his way from the Senate to the Chamber, full of tax cuts and shopping cuts – much more than the first of the second.

Republicans are looking for an increase in the roof of US debt from $ 36 trillion dollars (which the United States have already reached, forcing “extraordinary measures” to maintain the operational government) up to $ US41 trillion. The balance, according to the Committee for a responsible federal budget, would add $ 5.8 trillions to existing debt and deficit between 2026 and 2034.

If you are a bond investor, this reports more emissions of the United States government debt, within an environment made volatile and uncertain by the Trump rates and Musk’s devastation for the bureaucracy and one in which Trump has done a good job in antagonize foreign investors who have about $ US8.5 trillion, or 30 %, of the existing debt on emission.

Although (Japan, with $ US1,06 trillion and China, with $ 759 billion, are the greatest foreign holders) do not sell their existing participations, they may not be eager to add them while Trump is attacking their economies.

Less trade between the United States and the rest of the world would also mean less US dollars in the global and less dollar circulation with which to acquire US financial assets and help to absorb the refinancing of debt routine existing on the question, not to mention a much larger financing requirement. Less sources of purchase means prices of the lower bonds and higher returns.

Therefore, Powell and his Fed colleagues will have to think and prioritize the various scenarios in front of them.

They know that Trump’s policies will slow down growth and increase inflation, but cannot be sure of the size or duration of the economic collapse or pick-up in inflation.

Powell himself declared last week that “while the rates were highly likely to generate at least a temporarily increase in inflation, it is also possible that the effects can be more persistent”.

They also know that the slope of Wall Street’s sell-off and volatility in the bond market could have unexpected consequences.

There will be wealth effects, at a time when the trust of US consumers is decreasing rapidly, which will flow up to a lower growth even before the actual impact of Trump’s rates occurs at higher prices.

There may also be ailments within the Arcanian hydraulic plant of the US financial system.

Part of the turbulence in the bond market is attributed to a repetition of an episode in March 2020, when the Hedge Funds climbed to relax the so -called “base trade” or a loan strategy heavily to buy treasure bonds and sell future treasure to profit from the usual positive small diffusion.

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These exchanges can be exploited from 50 to 100 times to generate low risk profits unless, as in the first days of the pandemic and again in the last week, a significant volatility. Then the Hedge Fund, experimenting with margin calls from their lenders, in cash.

In 2020, the treasure market – the most important financial market in the world – almost exploded before the Fed intervened and pumped over $ 1 trillion of dollars on the market in the second half of March.

The Fed will give priority to financial stability on everything else, so it will look closely at the bond market and will intervene if it believes that there is a serious threat to the development of stability within it.

Otherwise, if forced to choose between fighting renewed inflation or supporting economic growth and employment, the Fed will probably choose to fight inflation.

It is possible that the effects of Trump rates are transient, although the nature and amplitude of the rates probably guarantee a long transition.

All except Trump and his less alphabetized economic councilors know that the Trump rates, in particular the more than 104 % rates that has placed on China, will lower the economic growth of the United States and will increase unemployment and inflation.

The Fed was there before, when he erroneously judged how transient the impact of the shock of the supply chain would be during the pandemic. As a result, the US inflation rate exceeded 9 % and used a 5.5 percentage of the rate of federal funds to bring it back to the point where it is/was almost under control.

It is unlikely that Powell and his teammates risk making the same mistake again, even if their choice helps to ensure that the United States fall in recession.

They are aware of the fact that once inflation expectations become rooted-and the inflation expectations of US consumers have been increased-can develop in a cycle of self-reinforcement with harmful long-term effects on the economy.

Regardless of the fact that the Fed increases or cuts the rates, the recession is possible, given how pervasive the impact of Trump rates will be throughout the United States economy. Trump rates on steel and aluminum – and products containing – already have a deleterious impact on prices and activities.

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While this year the markets are taking three or even four cuts in the rates, together with a probability of 60 to 70 % of a recession, the Fed will probably risk the Ire thought and Trump investors and give priority to its basic mandate of price stability.

Better a recession, even the hard (and avoidable) that could induce the commercial wars poorly designed by Trump, compared to the perspective of years of stagflation, or a prolonged period of low growth with high inflation which is one of the unpleasant but quite possible scenarios that the Fed would have contemplated.