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Donald Trump has made a lot of enemies during his short political career, but it’s one rift in particular, which has many investors nervous. On September 26, Trump launched an attack on the Federal Reserve, arguably the most powerful institution in the United States. Trump accused Chairwoman Janet Yellen of “doing political things” in keeping interest rates low.[1] While some pundits shrugged off the attack as hot air, Trump’s feelings toward the Fed can no longer be ignored now that he’s President.

That wasn’t the first time Trump took a swing at the Fed. At a rally in September the GOP leader criticized Yellen of doing President Barack Obama’s dirty work.

“She should be ashamed of herself,” he said. “What they are doing is, I believe, it’s a false market.”[2]

Trump’s attacks on the campaign trail was only the start of his cold war with Janet Yellen. Trump may be the most powerful person in the United States, but there are some strings he simply cannot pull. The independent Federal Reserve is one of them.

Yellen made that abundantly clear following the central bank’s decision to raise interest rates in December. In a news conference, Yellen subtly picked apart Trump piece by piece, beginning with the subject of Fed independence.

“I’m a strong believer in the independence of the Fed,” Yellen said following the central bank’s decision to raise interest rates for only the second time in a decade. “We have been given the independence by Congress to make decisions about monetary policy in pursuit of our dual mandate objectives of maximum employment and [minimum] inflation. That’s what I intend to stay focused on, that’s what the committee is focused on.”

She also responded to Trump’s threat that he would force her out of office before her tenure, “I guess the way I think about it is that I was confirmed by the Senate to a four-year term. The term of the Fed chair was not meant to coincide with the president … I do intend to serve out my four-year term.”[3]

So, will Donald Trump influence the Fed’s interest rate decisions? In my opinion the answer is yes, but not in the way he thinks.

For starters, the central bank has already acknowledged that Trump is weighing on their monetary policy decisions, especially as it relates to inflation. The Fed essentially has two jobs: encourage economic growth and price stability, and do so in a sustainable manner. Trump’s pro-growth policies threaten to derail those objectives, which means the Fed might have to raise interest rates faster than previously expected.

To understand why, we must look at inflation. The central bank targets inflation at 2%, and has done everything in its power to bring consumer price growth back to that target. But Trump’s pledge to cut taxes, deregulate the financial markets and spend a trillion dollars on infrastructure may lead to an overshoot the inflation target. One way the Fed controls price growth is by raising interest rates. That’s exactly what it’s doing now. With Trump in the fold, that process might occur faster than previously expected.

Central bankers now anticipate they will raise interest rates three times in 2017, followed by an additional two or three hikes in 2018.[4] Clearly, Trump is having a big effect.

Unfortunately for Trump, what the Fed does, matters a great deal to his presidency. For starters, analysts expect Trump’s economic plan to add $5 trillion to the public debt (which is already pushing $20 trillion).[5] It’ll be much harder to service $25 trillion of debt with higher interest rates rather than lower interest rates. Whether Trump likes it or not, low interest rates are necessary for his plan to work yet he has already attacked the Fed for keeping rates low.

The Fed threw no surprise punches in its first policy meeting under Trump. Policymakers voted unanimously to keep interest rates at 0.75% on February 1. Traders believe rates will rise in June, paving the way for at least two more hikes in the final six months of the year.

So, while the Trump effect seems to be playing a part in the Fed’s decisions, interest rates are Janet Yellen’s world. That’s unlikely to change from now until her appointment ends, but this year may just be filled with surprises.

Who do you think will play a bigger part in influencing interest rate decisions; Trump or Yellen?  We will keep you posted.

[1] Harriet Torry (September 26, 2016). ‘Donald Trump Attacks Federal Reserve, Yellen During Debate.” The Wall Street Journal.

[2] Larry Light (December 15, 2016). “Trump vs. Yellen: Signs of a cold war emerge between president-elect and Fed.” CBS News.

[3] Larry Light (December 15, 2016). “Trump vs. Yellen: Signs of a cold war emerge between president-elect and Fed.” CBS News.

[4] Board of Governors of the Federal Reserve System. Minutes of the December 13-14 Federal Open Market Committee.

[5] Jeff Cox (December 15, 2016). “The Donald Trump and Janet Yellen relationship just got more interesting.” CNBC.

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