At the start of August, we explained how - by scapegoating the global economy for the Fed's July 31 rate cut - the central bank had now trapped itself, having certified before the world that any further escalations in Trump's trade war are effectively a justification for more rate cuts. Whether this was Powell's intention is unclear, although as we said at the time, "it certainly means that Trump is now de facto in charge of the Fed's monetary policy by way of US foreign policy, and it also means that as BofA wrote, "the Fed is unintentionally underwriting the trade war."

Here, the only thing one can perhaps add is that the Fed may very well be intentionally underwriting Trump's trade war. In either case, as Bank of America's chief economist Michelle Meyer said, such a circular framework is a problem for many reasons, and as the bank admits, it is worried about an adverse feedback loop where the trade war hinders economic growth, therefore prompting additional Fed easing, which in turn allows for greater trade war escalation. This is shown in the chart below.

Fast forward to today, when in what in retrospect may be seen as a watershed moment in exposing just how "political" the Federal Reserve always has been despite repeated lies by various officials claiming otherwise, none other than former Goldman chief economist and the former head of the NY Fed, Bill Dudley, after looking at the chart above and having realized that the Fed is underwriting Trump's trade war, made a "modest proposal" in a Bloomberg op-ed in which he advised Powell to take a political stand against enabling Trump's trade war, and potentially go so far as to push the economy into a recession to prevent Trump from getting reelected!

Echoing what Powell said in his Jackson Hole speech, where he dedicated a section to Trump's ongoing trade wars, and blaming them for the Fed's rising inability to interfere in the US economy, Dudley begins with what is a clear political statement, arguing that "Donald Trump's trade war with China keeps undermining the confidence of businesses and consumers, worsening the economic outlook."

Dudley, who was among those globalists who enabled China's tremendous ascent, and assured that Beijing will surpass the US economically and militarily at some point by 2032 if the status quo is left unchanged...

... ignores the consequences of his actions, and instead slams Trump for being the one president willing to challenge China's hegemonic ascent and upcoming Thucydides Trap (which as we noted before virtually assures war with China if nothing is done), saying that "this manufactured disaster-in-the-making presents the Federal Reserve with a dilemma: Should it mitigate the damage by providing offsetting stimulus, or refuse to play along?"

Dudley's advice: "If the ultimate goal is a healthy economy, the Fed should seriously consider the latter approach."

While Dudley then spend the bulks of his op-ed explaining the diagram shown at the top, a relationship which our readers are already familiar with, what is of particular note is Dudley's discussion of why the Fed should 'refuse to play along' and refuse to underwrite, as BofA said, Trump's trade war.

One thing Dudley recommends is that "the Fed could go much further" beyond merely warning, as Powell did, that the Fed's tools are not suited to mitigating the damage from trade war, but "could state explicitly that the central bank won't bail out an administration that keeps making bad choices on trade policy, making it abundantly clear that Trump will own the consequences of his actions."