White House official yesterday said that Trump is looking to fire Powell. However, Trump later clarified that he does not intend to do so. How do you read this entire situation and what does this mean for central banks independence back in US?
Hugh Johnson: Well, the one thing that he has on again, off again. When we are talking about tariffs, we have seen that just to be an on again, off again phenomena. When it comes to Powell, it is on again, off again. The truth is everybody should not take what he says about firing Powell seriously. And the reason I say that is because he cannot fire Powell. It is against the law. So, he can say that he would like to fire Powell, but the truth is he cannot fire Powell. The Congress can fire Powell, but the president cannot. So, do not take anything he says about firing Powell seriously. Powell is not going to quit, he is not going to leave. He will be there until his term expires or ends and just simply accept that.
Like you said, Trump cannot fire Powell, but in a statement yesterday, he did say that he does not rule out anything. So, what does he mean by that? What are the actions that he can take against a Fed chair?
Hugh Johnson: I have not a clue what he means by that. There is really nothing he can do when it comes to Powell. Powell is going to stay as chairman of the Federal Reserve as I mentioned for another year or so. I am not exactly sure what the term is, but he is going to be the chairman of the Federal Reserve, so you can just simply relax and expect to continue to see his leadership.
But I might add that Powell has done an extraordinary job. When he started as chairman of the Federal Reserve, I was a little bit upset or nervous because he did not seem to be comfortable with some of the economic terminology that he had to deal with. But he has come a long way. And let look number one, he has been very successful as the chairman of the Federal Reserve. Things have worked out well. The economy continues to expand. Let us not forget that inflation was at 9%. It has now come down close to say 2.5%. I know we have not hit the 2% target, but he has done a really credible job on bringing inflation down and at the same time preserving ongoing growth in the economy.
And it looks to me as that combination is going to continue in the foreseeable future. He has done a great job. He cannot be fired. He is not going to quit. Well, we are going to have Powell for at least the next, I think it is a year that his term expires.
How do you assess the entire tariff situation and what impact will it have on global markets? The other day we had some tariff announcement that came in on Indonesia, today of course, Donald Trump has said that he has close to making a deal with India as well. Do you think markets have already reacted to anything that the market was expecting when it comes to tariffs and perhaps we will not see any major significant impact on margins irrespective of the kind of announcements we see?
Hugh Johnson: This is going to play out very much the way Trump one, 2018, 2019 played out. And the number one thing is there is going to be volatility in what Trump says. It is going to be on again, off again when it comes to tariffs with any individual country. Remember we talked about having roughly 60 to 70 deals done by now. We got three. So, it is going to be on again, off again. There is going to be a great deal of volatility on the tariffs that are threatened, that is number one.
The second step in the whole process is, which we are starting to see unfold, we saw it with the consumer price index and that is you are going to see the rate of inflation, the inflation that is associated with increased tariffs start to show up in the consumer price and personal consumption expenditure price index which are the important indexes which are followed by the Federal Reserve. In other words, the tariffs, the inflation associated with the tariffs will start to show up.
The third thing you will see is that the Federal Reserve will respond to that combination. And the way they are going to respond is they will not reduce short-term interest rates. The consensus now is they are going to reduce short-term interest rates one time in September and maybe one time in December.
I do not share that view because I do not think we will be making enough progress on inflation and the economy will be holding together and the Federal Reserve does not have to be in a hurry to reduce short-term interest rates. So, this is going to start to play out very much the way Trump one 2018, 2019 played out. Remember, we had a declining stock market when we were going through the increase in inflation during 2018 and the response of the Federal Reserve.
But that was followed in 2019 by the Federal Reserve reducing short-term interest rates as inflation came down and the stock market did extraordinarily well in 2019. So, tough times maybe in the foreseeable future, but after we go through those tough times of somewhat higher inflation, a lack of Federal Reserve response, we will start to get good stock markets. So, I am telling everybody to be patient. Be very-very patient. We are heading towards good times.
