You might remember that, in the days just before and right after Donald Trump’s surprise victory in November’s Presidential election, many people predicted that it would be a harbinger of a global economic slowdown, if not even a collapse. Writing in the New York Times, Paul Krugman lamented that “we are very probably looking at a global recession, with no end in sight.” (http://www.nytimes.com/interactive/projects/cp/opinion/election-night-2016/paul-krugman-the-economic-fallout) Time magazine echoed (and reprinted) Krugman’s sentiments, citing Helge Pedersen, the Chief Economist of Nordea that “Trump’s anti-globalization stance and protectionist trade policies could result in a trade war that would trigger a recession.” (http://time.com/money/4563085/donald-trump-global-recession-fears/) So dire were the economic prospects of Trump Presidency that, as the incoming returns indicated that Hillary Clinton was likely to lose the election, the Dow Jones Futures Market plummeted 900 points and global markets went into a tailspin on November 9th (http://www.usatoday.com/story/money/markets/2016/11/08/markets-election-night/93499832/). These prognostications, in their turn, echoed an assessment published by Moody’s last June on the “Macroeconomic Consequences of Mr. Trump’s Economic Policies,” in which they posited three potential scenarios – one of which posited a mere economic slowdown and two that predicted outright medium-term economic recession (https://www.economy.com/mark-zandi/documents/2016-06-17-Trumps-Economic-Policies.pdf)
However, by Thanksgiving weekend, the Dow Jones Industrial Index, Nasdaq, and S&P have shot to record highs (http://www.cnbc.com/2016/11/25/us-markets.html). Far from panicking, it seems that the advent of a Trump Presidency has not only reassured the markets, but made them practically bullish. This has led many writers, as well as me, to conclude that the Fed will raise short-term interest rates when it meets in mid-December (http://www.wsj.com/articles/split-fed-in-november-signaled-rate-increase-could-come-in-december-1479927708). Although the Fed denies that the advent of a Trump Presidency has influenced their decision, the buoyancy of the market following the electoral shock of November 9 would serve to reaffirm this decision, even if it was made before people went to the polls.
At this juncture, it is reasonable to ask, “what is going on?” How could a Presidency welcomed with so much fear and trembling prove to be so energizing in the markets? Why would the Fed not simply hold the line on interest rates until the next quarter in order to play it safe and see for itself what kind of President they have in Donald J. Trump? Here are four reasons why the Fed believe that raising the short-term interest rate next month is key in assuring continued growth without inflation.
1. Over the past year, the U.S. has experienced both decreasing unemployment and increasing wage rates. As USA Today has reported, although job creation has slowed since 2015, the unemployment rate still hovers as 4.9% while the average pay rose 2.8% “the fastest pace in seven years.” (http://www.usatoday.com/story/money/2016/11/23/some-fed-officials-hike-rates-next-meeting/94338598/) Unemployment rates that fall below 4% risk triggering an inflationary spiral – as tight labor markets force up wages – which the Fed will likely want to head off.
2. As a recent Kiplinger’s study shows, consumer confidence is up and holiday sales are projected “to rise 4.1% this year – not as good as the 4.8% posted during the 2014 holiday season, but much better than the 2.5% hike last year.” (http://www.kiplinger.com/article/business/T019-C000-S010-retail-sales-consumer-spending-forecast.html) Again, a slight raise in the short-term interest rate will help to keep consumption from overheating, since the raise in the rate will likely notch up borrowing rates to individuals, and maintaining presumably steady growth going into the new year – and new Presidential administration.
3. For all of Mr. Trump’s anti-establishment rhetoric while on the campaign trail, the new President-elect’s choices for key positions in his Administration, so far, show that he is seeking to reassure Wall Street. Trump has chosen Myron Ebell, Director for the Center of Energy and Environment at the Competitive Enterprise Institute, to lead his EPA transition team. Moreover, he seems poised to nominate Wilbur Ross, chairman of the private equity firm, WL Ross & Company as Commerce Secretary, and has named Betsy DeVos, the wife of Amway CEO Richard DeVos, Jr., as his Education Secretary. Whatever one thinks of the particular political agendas of each of these picks, collectively they are a strong signal to Wall Street that the incoming Trump Administration will be sympathetic to their interests.
Trump approach to economic growth seems to be built around three key factors:The first is deregulation, the second is an emphasis on enhanced exploration of energy sources and last is an intentional effort to assure that American corporations remain in the US. These three elements are driving much excitement and interest in Wall Street and beyond. It is impacting consumer confidence as reflected in spending patters of individuals especially during this crucial holiday season of the year.
As a result the Fed will likely raise the interest rate a notch (0.25%-0.5%) not so much out of a fear of a Trump Presidency but mainly in order to keep the economic ship steady as a new administration takes over the helm and to assure that inflation will not become a factor that will challenge economic growth and stability in the US and beyond.
It is my advice and belief that markets and individuals will not over react to the raise and that it will have a positive impact on economic growth.
Why the FED Will Raise Interest Rates on December 14 2016, Kokomo Perspective
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