Stock market sell-off: Why Trump is blaming the Fed and what it means


jerome powell
Federal
Reserve Board Chair Jerome Powell testifies during a House
Committee on Financial Services hearing, Wednesday, July 18,
2018, Capitol Hill in Washington.

Jacquelyn Martin/AP

  • President Donald Trump is blaming the Federal Reserve for the

    stock market’s sell-off
  • While it’s unusual for the US president to publicly bash the
    Fed, many investors agree that fears of higher interest rates are
    partly responsible for the volatility. 
  • By pitting himself against the Fed, Trump is raising the
    stakes of a monetary-policy error. 

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. 

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