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Trump’s Fed Attack – Why
By David B. Armstrong, CFA | Oct 12, 2018 | Weekly Market Commentary
The President recently went off about the Fed raising interest rates. He had a lot to say across several TV appearances, one comment being, “The Fed is going loco and there’s no reason for them to do it. I’m not happy about it.”
There is quite a bit of reporting on this, so I’ll try to get straight to the point.
A lot of people agree with how Trump feels (they just communicate it differently). Basically, Trump believes there is no reason to raise rates at this time. The Fed’s dual mandate of low inflation and low unemployment has been achieved and more rate increases only raise the risk of a recession.
This is important because recessions end bull markets. Earlier this month I wrote about how we are tracking recession risk and our new gauge, MONCON.
Thursday morning, CNBC’s Joe Kernan took Trump’s side on this. He agreed with Jim Cramer’s take that Fed Chairman Powell had committed a “rookie mistake” when on October 3rd he told Judy Woodruff that the Fed funds rate was “a long way” from neutral.
That was the comment which touched off the market’s recent volatility. Since then, we’ve seen the DJIA, S&P 500, Nasdaq and Russell 2000 decline significantly.
Wednesday, Cramer suggested all Powell needs to do to stop the market decline is walk back his comments to Woodruff and recommit to the Fed being “data dependent.”
It’s tough to see Powell doing that. You know, egos and all.
If Powell does not walk back his statement, or at least clarify it, the interpretation that markets/investors are making is that so long as GDP growth fits into the Federal Open Market Committee’s (FOMC) definition of “positive” (somewhere between 2-3% GDP growth) the Fed will continue to raise rates…and possibly too much.
This is different from a month ago, where two rate hikes by mid-2019 was pretty much what everyone was expecting. Now, Powell has effectively opened the door to three, four or more in 2019.
Not good. Recession risk increases when inflation and employment are where they should be but the cost of borrowing money increases…because the harder it is to get or afford money, the slower the economy. Think housing and cars – if they become harder to afford, supply outpaces demand and prices go down. I don’t want to dive into an Econ class but that trickles down hard into the general economy.
Since Powell recently indicated that tightening financial conditions on par with early 2016 would be sufficient for a pause, markets and investors are having a HOLY S#!T moment. Why? Because 2016 saw a selloff in equities of 10+%. The market is collectively thinking, “Well if we had a 10% sell off in 2016, we will probably have that again, right?”
BOOM, market sell off AND an extrapolation that there could be another 5% more of loss before a Fed shift in thinking occurs.
I’m in the camp that with the political dynamics currently in play, the Fed rhetoric will settle down and soften the assumptions of over-tightening expectations currently causing problems. I think this means we see a near-term bottom.
No one at the Fed wants to cause a recession by overtightening, but if that happens it’s going to start showing up in our MONCON gauge and it will be very promptly communicated here.
For now, we remain at MONCON 5.
Keep looking forward,
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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