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The Fed Takes on Trump - Outside View by Asad Dossani

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The Fed Takes on Trump
Mar 16, 2017

As was widely expected, the US Federal Reserve raised interest rates by a quarter percentage point yesterday. Their outlook suggests both inflation and employment are close to target and the case to renormalise monetary policy is strong. In other words, to move away from the easy money we have grown accustomed to.

A month ago, the Fed went out to convince the market it was going to raise rates. At the time, not many people expected a rate rise. After a few speeches by Fed board members, that changed. It typical style, the Fed likes to warn the market of a rate rise. This way, the markets don't crash from the surprise.

But why did they do this? What changed in the last month? It wasn't the economy. And it wasn't inflation or employment forecasts. Or maybe Janet Yellen is not the dove we thought. But that too, seems unlikely.

What did happen a month and a half ago was Donald Trump. He came along with a plan to increase government spending and cut taxes. Both of which mean more government borrowing. But for the government to borrow more, they need low interest rates.

As interest rates go up, it becomes more expensive for the government to borrow. It becomes more expensive to borrow to service existing spending commitments, let alone new ones. And though Trump campaigned against the Fed's easy money, he must surely miss it now. If the Fed continues to raise rates, Trump's plans will have to change.

Politics is a spectator sport. There are many players. Some work together. Some compete. And right now, most government institutions are working against Trump. Including the Fed. They want to undermine him, and make his presidency a failure.

This isn't a good or bad thing. It's just how things work. Remember how the Indian government undermined the RBI by getting rid of Raghuram Rajan?

But Trump has no one to blame but himself. He went around campaigning against most of the government, including the Fed. He should learn that his words and tweets matter. If you insult someone, they are going to fight back.

Like I said, this is a spectator sport. We can watch, listen, and comment. We can't do much about the outcome. It is easy to forget that ordinary citizens are affected by what happens in government. And unfortunately, they are usually the victims.

Asad is an Economics Graduate from The London School of Economics who has also been a part of the currency derivatives team of Deutsche Bank in London. Currently pursuing his PhD at the University of California San Diego where he's researching on Algorithmic Trading Strategies, Asad will be your direct line for answers to all the questions you might have on short-term investing. A part of the Equitymaster Team since 2010, Asad has been sharing his knowledge on short term trading strategies with our valued readers, like you, through our various services. In fact, at the last count, his weekly newsletter, Profit Hunter, was being delivered to more than 100,000 smart traders across the world!

Disclaimer:

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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