“We have a Fed that’s doing political things. This Janet Yellen of the Fed. The Fed is doing political [sic] — by keeping the interest rates at this level. And believe me: The day Obama goes off, and he leaves, and goes out to the golf course for the rest of his life to play golf, when they raise interest rates, you’re going to see some very bad things happen, because the Fed is not doing their job.”
This was in response to a question about his economic agenda. Time magazine called this statement a conspiracy theory that was supported by no evidence.
At the time, the Federal Reserve was in the process of hiking interest rates gradually. This was after leaving rates very low since the financial crisis. The Fed – along with other central banks – brought down the interest rates with the aim of providing support to the economy. Low interest rates enabled many people and companies to borrow, which in turn led to slight gains on inflation.
Under the Trump administration, the Fed has continued to hike interest rates. In 2017, the Fed increased rates four times and this year, it has already hiked three times. The Fed is expected to do another hike in December this year. In the last meeting, the officials said that they would do three hikes in 2019 and another one in 2020.
The Federal Reserve was created to be apolitical organization and the president does not have a say about how it operates. However, a president has the power to nominate the officials who will serve but he has no powers to fire a sitting Fed Chair. Fed up with Yellen – who he viewed as a globalist – Donald Trump appointed Jerome Powell as the Fed chair. This made her one of the few Fed chairs to serve in one term.
However, the president has buyers’ remorse with the Fed chair he appointed. He has continued to criticize the Fed for the continued pace of rate hikes. Yesterday, he said that the Fed had gone crazy. He then doubled down on this statement saying that the Fed had gone ‘loco’. A few months ago, he said that the Fed was continuing to work against his agenda. This is because while Trump has focused on easing the fiscal policy, the Fed is tightening. After his statement, the dollar index fell sharply as shown below.
The decline was because traders fears that the Fed could listen to the president and stop the gradual tightening policies. It could also continue to tighten to show its independence from the executive branch of the government. However, halting the rate hikes could be in its benefit as well. This is because the Fed is not under pressure to tighten. In fact, other central banks are still easing as well. In addition, the yield curve is nearing inversion and it is not in the Fed’s interest to continue tightening at a time of inversion.
All this happened as the US stocks and bonds continued to decline. This week, the Dow has lost more than 1000 points. Surprisingly, bonds fell as well leading to this comment by Larry McDonald of ACG Analytics:
“In the past 3 years, there have only been 14 trading days [including today] where the S&P 500 was lower more than 1% and US bonds were also lower on the day. Stocks [and] bonds are wearing a very rare positive correlation.