Trump’s unusual Fed bashing raises the stakes of a policy blunder that damages the economy

jerome powell

President Donald Trump is blaming the Federal Reserve for the stock market’s sell-off.
While it’s unusual for the US president to publicly bash the Fed, many investors agree that fears of higher interest rates are partly responsible for the volatility.
By pitting himself against the Fed, Trump is raising the stakes of a monetary-policy error.

President Donald Trump is not known to mince words. And this week, he offered his sharpest rebuke yet of the Federal Reserve.

“I think the Fed has gone crazy,” Trump said Wednesday about the Federal Reserve’s interest-rate increases. On Thursday, he told Fox News the central bank “is going loco.” He also said he was not going to fire Fed Chairman Jerome Powell.

Trump said all of this after the longest streak of stock-market declines since the days before the November 2016 election. He was expressing his angst at the declines and assigning blame to the Fed, having posted dozens of congratulatory tweets about the stock market’s record highs.

It’s unheard of for US presidents to publicly bash Fed policy. But by echoing some investors’ concerns about higher borrowing costs, he raised the stakes for the central bank to not make a policy error that damages the economy.

Powell fanned the investors’ latest fears about higher interest rates last week Thursday, when he said in a speech that the Fed was a “long way from neutral.” He referred to the neutral interest rate that neither slows nor speeds the economy.

“The current dip in confidence can be allayed were the Federal Reserve to signal it is easing off its quantitative tightening and rates rises,” said Jasper Lawler, the head of research and education at London Capital Group, in a note on Thursday.

“But the Powell Fed has shown more confidence in the face of market uncertainty and we don’t expect any change in tone. We expect the Fed will hold on for the ride.”

The Fed is expected to raise its benchmark rate once more this year and three times in 2019.

Powell has “reset market expectations”

Parts of the economy and the stock market that are sensitive to higher interest rates are also useful gauges for the impact of Fed policy.

“We are already witnessing some softness in highly rate-sensitive segments of the economy, such as the housing sector, where home price appreciation has slowed somewhat and fewer new homes are being …read more

Source:: Business Insider

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