Published: Sat, October 13, 2018
Markets | By Otis Pena

Trump blames stock market drop on Federal Reserve

Trump blames stock market drop on Federal Reserve

President Trump's trade war with China is starting to take a bite out of growth, energy prices are rising, the global economy is slowing and US interest rates are going up.

Avoiding an overheated economy will help to ensure that America does not experience a renewed bout of inflation and that it can try and achieve a soft landing.

Asked if he would fire Federal Reserve Chairman Jerome Powell - his own nominee - President Trump told reporters he was not considering such a move. They have reached out to the Fed leader to ensure there hasn't been improper political interference. "That is a good model for transparency, and not just for us".

Powell's goal is to extend the second-longest USA economic expansion on record by moving interest rates up just quickly enough to prevent overheating, but not so rapidly that the central bank chokes off growth.

"It probably won't be long before there is evidence of slowing economic data", said Paul Ashworth, chief US economist at Capital Economics. The Nasdaq dropped more than 4% in the worst percentage decline since June 2016. "But I really disagree with what the fed is doing. OK?"

But to what level?

Treasury Secretary Steven Mnuchin went to Indonesia this week intending to push President Donald Trump's tough stance on China with USA allies - but found himself once cast as the administration's defender-in-chief. Powell defended the Fed's plans to raise interest rates gradually in the coming months, saying it was appropriate policy in such "extraordinary" economic times.

The resurgent economy suggests that it's time to pump, not slam, the brakes on the economy or risk the kind of inflationary spiral that America experienced in the 1970s. Powell and other policymakers are mindful of that lesson and don't want a repetition of stagflation. The quick jump in yields in turn spooked equity investors amid fears that rising rates could dent corporate profits, slow economic growth and lead to a slump in stocks.

The market has been rattled by rising interest rates, signs of a slowdown in the global economy and the US-China trade dispute.

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At least it's not easy if you listen to Jerome Powell. The trade deficit with China actually rose in September by $34.1 billion, or a 13 percent increase.

Trump said he had no intention of firing Powell.

"The fundamentals and future of the United States economy remain incredibly strong", press secretary Sarah Sanders said in a statement after the close.

The return investors earn on the US 10-year Treasury bond recently jumped to its highest level since 2011.

"We have interest rates going up at a clip that's much faster than certainly a lot of people, including myself, would have anticipated". He also mentioned the Fed is monitoring other risks - "the strength of economies overseas, the effects of ongoing trade disputes, and financial stability issues" - all of which, if they prove real, would suggest less tightening rather than more as a monetary policy response. Rates are going up. "They emphasised to me that it is not in their interest to see the [yuan] continue to depreciate".

His criticisms came during remarks at the White House.

Mnuchin met with Chinese officials on Thursday.

"The truth is the Federal Reserve did go insane a few years ago and drove interests rate down to zero which had never happened in history".

Jacob Heilbrunn is the editor of the National Interest.

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