Federal Reserve in Trump's line of fire but unlikely to change course

Jermaine Castillo
October 12, 2018

"The Fed continues to flood the market with USA dollars", he said in one tweet. "These are all valid concerns that have shown up in world markets", he wrote in a note to clients on Thursday.

To use the technical term: Yechhhh!

But for all the stock market palpitations and risks to particular interest-rate sensitive industries, the message to take from the recent rise in interest rates is an unambiguously good one: This expansion may have some life in it yet.

Trump's blunt public criticism of the Fed, which began this summer, is without precedent.

Now he expects many investors see the good times coming to an end. As opposed to reacting.

With inflation barely above two per cent and unemployment at the lowest in a generation, the Fed is expected to tighten once more this year, and three or four times in 2019.

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Buying all those securities drove up their prices, which means that it drove down their interest yields.

"If you look at the charts and you look at the way the market's behaving and you think about the trends that are underneath the bond market, it wouldn't be surprising at all to see the 30-year [yield] go to 4 percent before this move of the breakout above 3.25 percent is over", he told CNBC. Tokyo's Nikkei 225 gave up 3.9 percent and Hong Kong's Hang Seng index shed 3.5 percent.

Add it all up, and it means the world's most savvy investors are betting that the US economy will keep growing at a healthy clip, without inflation emerging, but that the Fed will have to keep raising rates well above current levels in order to prevent that inflation.

In addition, the looming increase in the federal budget deficit will require the Treasury to increase the amount of money it borrows.

Interest rates are rising.

"The Fed's reckless policies of low interest and flooding the market with dollars needs to be stopped or we will face record inflation", he said in the other. But that's not right.

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'We know the Fed is independent.

Raising interest rates was justified "for those economies that are showing much improved growth, inflation that is picking up... unemployment that is extremely low", Lagarde told a press briefing in Bali, Indonesia where the International Monetary Fund is holding its annual meeting.

"Part of President Trump's brand is he says what he thinks, but he respects the independence of the Fed and that's clear from his nominations", Hassett said at Council on Foreign Relations on Tuesday.

But, crucially, the higher long-term interest rates don't seem to be driven by expectations that inflation will soar higher.

Dramatic and sustained stock market declines can feed into that outlook through a "wealth effect" if they begin to erode household and business confidence, and prompt consumers and investors to curtail spending.

But history and precedent tell us that the Fed's ability to cause a sudden stock market crash may actually be limited. "That suggests the Fed will keep raising rates, and that's taking the wind out of the stocks that have done the most, particularly in the tech sector". And as a result, for reasons I won't go into here, the stock market would be lower than it is.

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"I wonder today whether Trump really has some buyer's remorse with respect to selecting Powell as his Fed chairman, because that was a unusual pick", Moore said.

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