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 built than previously in the cycle,” said Rick Rieder, the chief investment officer of global fixed income at BlackRock, in a note on Thursday.
“Auto sales is another area we might expect to see some eventual slowing, as higher rates typically bite with a lag.”
The Fed pays close attention to how financial markets react to its rate hikes, and equally watches the economic data. Since the rate hikes began in late-2015, the S&P 500 has gained about 40%, suggesting this might well be another brief volatility episode. Also, inflation has remained near the Fed’s 2% objective.
“So far, the economy has performed very well and very much in keeping with our expectations,” Powell said during his most recent press conference in September.
However, some investors – and now Trump – are worried that the Fed is unmoved by the red flags popping up in financial markets and some corners of the economy.
“Powell kind of reset market expectations … when he surprised the market by suggesting the Fed could eventually blow through the neutral rate, and that very accommodative policy is no longer appropriate in this environment,” said Michael Arone, the chief investment strategist for the US SPDR business at State Street Global Advisors.
“What is happening now is that for every major economic release, investors are looking for data, whether it confirms what Powell said or contrasts what Powell has said,” Arone told Business Insider.
In other words, they’ll be looking to see whether Powell was right. And by wading into the debate, Trump has lifted the stakes even higher for the Fed to get it right.
