Published: Tue, October 16, 2018
Markets | By Otis Pena

After Dow nosedives, Trump says "the Fed has gone crazy"

After Dow nosedives, Trump says

US President Donald Trump looks on as Federal Reserve Chairman Jerome Powel speaks at the White House.

"We're in the boom".

"A lot of the Fed's power is in perceptions", said Diane Swonk, chief economist with Grant Thornton in Chicago.

Trump has cast blame for the market turmoil on the U.S. central bank.

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".

One way to think of it is that Trump's tax cuts were equivalent to pouring gasoline on the economy.

The Fed last raised interest rates in September and left intact its plans to steadily tighten monetary policy, as it forecast that the U.S. economy would enjoy at least three more years of economic growth.

"The economy is red-hot and threatens to fry". Trump has departed from that practice and has said he would not shy from future criticism should the Fed keep lifting rates. Hassett pointed to the six nominees Trump has made so far to serve on the Fed's board of governors, all of whom have spent extensive time in finance, banking or academia. "As soon as the elections are over, he's going to forget about the Fed and focus on other things".

"To criticize what the Fed has done is out of line with how the market has reacted to what the Fed has done".

"The Fed doesn't have the luxury of moving much slower". The Fed was plowing ahead with rate increases, while investors were evidently skeptical that growth would be persistent enough to justify higher long-term rates. Some 30-year fixed-rate mortgages are now offered with an interest rate above 5 per cent, significantly higher than when Trump took office.

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Over the past decade, Wall Street became addicted to easy money.

However, some investors - and now Trump - are anxious that the Fed is unmoved by the red flags popping up in financial markets and some corners of the economy. If we need to raise rates more than expected we can do that in a reasonable way.

The tariffs Trump imposed on China and other trading partners on key goods like steel and aluminum, and Beijing's retaliation against USA products, have raised prices for American companies, which is expected to start to hurt corporate profits and could dampen investment as well.

That makes it even more important for the Fed to be watchful for inflation.

Is a recession coming soon?

Trump has levied or threatened tariffs on goods from economies around the world, notably China, but also on traditional allies such as the European Union. Prices for long-term bonds are more sensitive to rises in rates than short-term ones, because they lock investors into a lower rate for a longer period. And wage growth actually decelerated a bit in September.

Mr. Williams said that once rates were at a normal level, then the Fed would be well positioned to respond to surprises-either inflationary or a softening in the economy-that may require raising or lowering rates. "The fact that there's a market correction is not particularly surprising".

"We are in an economic boom most folks thought was impossible", Larry Kudlow, Trump's top economic adviser, told CNBC on Thursday. He also expects the Fed to overshoot its 2% inflation target by "a bit" but added, "I don't see any signs of greater inflationary pressures on the horizon".

Powell has repeatedly downplayed the president's comments, saying they have no impact on the Fed's decision-making.

Zandi doesn't think so. "However, with the strength of the U.S. economy and core PCE, the Fed's favourite inflation metric, now in line with its 2% target, the Fed's decision to move away from the ultra-easy monetary policy that characterised the years following the financial crisis is arguably justified".

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