M&G head of retail fixed interest Jim Leaviss has warned on the risk of a “gold nutter” or Trump business crony replacing Janet Yellen at the head of the US Federal Reserve if markets or the economy falter under her watch.
While it was initially expected that Donald Trump would fire Yellen immediately upon taking the presidency, he has since said that he likes the lower interest rates that have been overseen by the dovish chair of the US central bank.
The US Fed left rates unchanged at its last meeting earlier this month. The target range for its federal funds rate sits at 0.75 per cent to 1 per cent.
Leaviss notes Stanford professor John Taylor and former Federal Reserve governor Kevin Warsh have been previous frontrunners for the job, but both are much more hawkish than Yellen and therefore might not be viewed favourably by Trump.
Taylor in particular is known for the Taylor Rule, a rules-based approach to monetary policy that would take interest rates above 4 per cent by 2019. Warsh has also criticised accommodative monetary policy and said markets have been “spoiled” by it.
“That raises the risk that it’s not one of these professors or one of these Fed people, but a businessman crony of Donald Trump or worse still a gold nutter or someone who has very little grasp of monetary policy or economics,” Leaviss says.
The firing of FBI director James Comey last week fuels Leaviss’s concern that Yellen may not accept another term as chair of the bank.
“Its a hiding to nothing. The economy does well as Trump takes the credit, any downturn, any selloff of stocks, she’d get fired,” Leaviss says.
However, he notes that the feeling in Washington is that Yellen would find it difficult to turndown due to her desire to protect the Fed, which could be threatened by the Tea Party wings of the Republican Party.
While Leaviss argues bond yields in developed markets look too low given the outlook for central bank rate hikes and the outlook for inflation, he argues they are not on a “disastrous roller coaster” back to their pre-financial crisis levels.
“To call this the end of a 30-year bull market, in which bond yields go in a straight line upwards to four, five, six per cent at levels that we were used to in terms of short-term interest rates before the global financial crisis is massively premature.”
US Treasuries look “mildly attractive” to investors “for the first time in a very long time, certainly since 2013”, Leaviss adds.
He points out forward-looking yields for the 10-year US Treasuries have risen in line with the most hawkish long-run rate expectation around 4 per cent, whereas for the the last couple of years they’ve been sitting just below the median, which currently sits around 3 per cent.
Leaviss says this is perhaps due to uncertainty over Trump possibly pushing a lot more Government bond issuance and suggests may be so-called bond vigilantes could come back into play and punish the Government for borrowing too much.
Leaviss says he is already skeptical about the so-called Trump trade, particularly with the ability of tax cuts to boost GDP, which he says did not happen in the eighties when Ronald Reagan implemented the same supply side policies.
“There is already skepticism on the reflation trade. Is there going to a $1trn infrastructure spending? Absolutely not. Are we going to get the scale of tax cuts people thought we were going to get? No, probably not.”
An impeachment would see some unwinding of the Trump trade, Leaviss says, but he says he would not know what to make of a US presidency under Mike Pence, if that were to be Trump’s successor.
He points out the US dollar has already weakened this week on noise around Donald Trump, following his firing of Comey and leaking of classified information, reportedly passed on to the US from Israeli intelligence.
However, Leaviss says he does not think it will be the current wave of scandals that will lead to Trump’s impeachment.