If a normal person owed a lot of money and interest was choking their household budget, they would love to go push for a lower rate, to refinance at much better terms. If market rates were high, there would be no chance of refinancing and lightening their interest payments as a percentage of their household budget. Loan markets just don’t work that way.

But the rules may be different for the public sector. By pushing for much lower interest rates than those at the present time, the US seeks to implement a “fiscal dominance”, scenario that makes government financing cheap.

Given the latest budget bill and the projected debt level it will create, they need lower rates. President Trump even stated this idea when he said the Fed’s benchmark rate should be three percentage points lower than the current 4.25% to 4.5% range, arguing that such a reduction would save $1 trillion a year in interest cost. A comment later shows he is aware of the risk of lowering interest rates when he said, if inflation is a problem the central bank could raise rates. Whiplashed rate movements would not build confidence in the US dollar.

He is also doing his best to stack the Fed Board of Governors by putting new members on the board that agree with his view that interest rates must go down. Most recently, a letter accusing Federal Reserve Governor Lisa Cook of falsifying documents for a private loan may give President Trump the chance to stack the board in his favor.

Further to stacking the board, President Trump has made his intentions clear to get Powell out and put in a chairman who is more likely to do his bidding.

Post Jackson Hole, Fed President Powell is hinting at lowering rates at the September meeting, due to weak labor numbers. In this case he will prioritize jobs over inflation. While this rate cut will probably not be big enough to appease the White House, it could be the start of multiple cuts. The key questions are “how big will cuts be in total” and “how fast”.

Will the start of rate cuts get President Trump off Powell’s back?

Will they be determined by the White House or will the US Fed stay measured?

Aggressive rate cuts support fiscal dominance, creating a lower interest rate to minimize interest costs in the budget.

Let’s review the negatives of fiscal dominance. First, it would require a less independent US Fed, which would cause investors to be worried and sell US assets. Second, it could create inflation that cannot be stopped by a quick about face saying, “oops we made mistake and have to raise rates again”. Third, the US dollar would take a hit, a hit too big to easily quantify beforehand. Fourth, a lower interest rate would lead to more borrowing and eventually an even bigger debt problem. All these things can weaken the US dollar.

So, if there is even a slim chance of President Trump getting his way, investors should start diversifying away from the US dollar.

In times of a weak dollar, emerging market currencies and investments standout, like bonds in Brazil and Mexico. European bonds, even though their rates are low, should do well in a time of a weakening US dollar. In Latin America you can get a good return versus US dollar from high rates and appreciating currencies. In Europe the return versus US dollar will be mostly from the currency.

Etherfuse bonds in Brazil, Mexico, and Europe are all good, tokenized options to diversify away from the US dollar.

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