The Federal Reserve did it. The central bank defied President Donald Trump’s public statements and tweets, and pulled the trigger on a December rate hike, raising interest rates 25 basis points to a target range of 2.25% and 2.50%. Fed Chair Jerome Powell and the Federal Open Market Committee (FOMC) did trim the 2019 forecast, lowering the number of planned rate hikes from three to two.
…anything else would spook the market.
Following the end of its two-day policy meeting, the central bank said the U.S. economy is advancing at a healthy rate and the labor market continues to grow. It further noted that risks to the national economy were “roughly balanced,” adding that it would “continue to monitor global economic and financial developments and assess their implications for the economic outlook.”
The Fed became dovish, explaining that “some” gradual rate hikes would be necessary in 2019. This was a complete change from just a couple of months ago, when it penciled in at least three moves next year. And, unlike in most of the previous meetings, there weren’t any dissenting votes.
At a press conference, Powell told reporters that the Eccles Building is content with its strategy to unwind its $4.5 trillion balance sheet. Last year, the Fed started to reduce the number of acquisitions for Treasury and mortgage-backed securities (MBS), bringing the total down to $4.14 trillion. Despite his satisfaction with the balance sheet, he still prefers to use the fed funds rate to control interest rates because anything else would spook the market.
As expected, the Dow Jones Industrial Average plunged on the news, paring earlier triple-digit increases. The leading U.S. stock index ended the trading session 500 points lower for a new closing low for the year. Despite a meteoric start to 2018, the equities market has given up its gains on the year.
White House’s Fed Hostility
Prior to the meeting, President Trump took to Twitter to urge the Fed to postpone a rate hike, tweeting:
“It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike. Take the Victory!”
Trump has been quite vocal in his criticism over Powell and his path to normalizing monetary policy. He revealed to The Washington Post that he is “not even a little bit happy with my selection of Jay.” Trump explained that he is disappointed in not being accommodated by the central bank, telling the newspaper that “they’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.”
Other administration officials have also slammed the Fed. White House trade adviser Peter Navarro called the Fed “crazy” for both raising rates and signaling rate hikes in 2019. He believes an intensifying market rout could be prevented if they delayed plans to boost the target rate and just examined the data.
But Treasury Secretary Steven Mnuchin has a different look at the volatility and the Fed. Speaking in an interview with Bloomberg, Mnuchin blamed high-frequency trading and the Volcker Rule. The former refers to supercomputers designed to execute transactions at quick speeds, and the latter to a standard that prohibits banks from trading for their own accounts.
Powell does not appear to take the remarks personally, confirming that the president’s tweets will not have a bearing on Fed policy.
Good or Bad for Trump?
So, with the Fed dismissing the White House’s concerns and moving ahead with incremental normalization, is this good or bad for the Trump presidency?
Well, Trump knows it’s bad, hence his reluctance to accept the Fed’s actions.
It appears that the era of easy money is slowly coming to an end. The policies of artificially suppressing interest rates and keeping the printing presses running 24/7 are ostensibly winding down. While the M2 money supply is growing, its growth is moderating, and this cannot sustain the bull market of the last decade. This is why nearly every facet of the equities market is becoming bearish, even the FAANGS.
Price inflation is also on the horizon, as we recently saw in the producer price index (PPI) and the consumer price index (CPI). If you excluded energy from the inflation gauges, then it is evident that the cost of living, particularly rents and health care, is climbing higher.
Falling share prices, dissipating bank lending, rising inflation, and higher borrowing costs. The U.S. is about to enter the bust phase of the boom-bust cycle, and this is what President Trump will look forward to, whether he’s serving just two more years or another full term. Of course, his opponents will drool over the prospect of a weakening economy – anything to blame on Trump.