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Not only the American President had a vivid reaction towards the Fed’s decisions, the markets did too
Not only the American President had a vivid reaction towards the Fed’s decisions, the markets did too. Image: REUTERS/Jim Young

Federal Reserve Increases Rates, Despite Trump Opposition

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Not only the American President had a vivid reaction towards the Fed’s decisions, the markets did too. Image: REUTERS/Jim Young

In a ten-year high increase, the American Federal Reserve has increased its rate by 0.25%, to a target range of 2.25%-2.5%. The announcement sparked an important disapproval, including from the President of the United States Donald Trump himself.

Trump appointed the Fed’s chairman, Jerome Powell and blamed the central bank for unsettling markets as it underestimated the President’s economic decisions, including rising trade tariffs. This is the fourth increase in 12 months that central bank officials have approved in a row – two happened this year and two will take effect in 2019. 

playbook 2019

The Fed justified its decision to readjust its rates as the economic growth had slowed down in 2018 and that its measure of inflation did not meet the 2% target it was predicting for this year. However, the GDP for this year was up at 3%. Analysis. 

When the President disagrees with the Fed

In its official release, the Fed shared that “the labor market has continued to strengthen and that economic activity has been rising at a strong rate”. The Fed justified the increase for the federal funds rate of 2-1/4 to 2‑1/2 percent “in view of realized and expected labor market conditions and inflation”. This is 1.75 points higher than when Donald Trump took office last year.

Several Presidents have criticized the Federal Reserve, but so far, none have criticized it as much as Donald Trump. On December 18th, he posted a virulent tweet calling the Fed’s decision a “mistake”, describing the increase as “meaningless numbers”.

As a presidential candidate back in 2016, Donald Trump warned “artificially low induced interest rates” would likely create an economic bubble waiting to burst.

However, since Donald Trump became President, he has been telling the Federal Reserve to keep interest rates low – which confused the highest banking institution in the country.

Markets reacted vividly

Not only the American President had a vivid reaction towards the Fed’s decisions, the markets did too.

On December 20th, the shares dropped right after the Fed’s announcement, changing earlier gains forecasts. S&P and The Dow closed at 1.5% lower, while Nasdaq fell at 2%.

On the Asian Continent, Japan’s Nikkei 225 was down 2.5% last Thursday, following Wall Street’s lead.

Hong Kong’s Hang Seng index and South Korea’s KOSPI index were both down more than 1%, while Australia’s S&P/ASX 200 was down 0.85%.

However, analysts tend to think the Fed made the right decision in order to sustain a steady growth in the economy.

Fed’s goal: a zero interest rate

According to an expert op-ed from Market Watch, the main obstacle between the Fed’s decision and the Republican party’s opinion is that Trump’s party thinks that a zero interest rate might impede the national economy.

This year, the American GDP was growing at more than 3% and the unemployment rate was an exceptionally low 3.7%, which, according to the Republican Party, was a strategical year to increase the rates – and not reduce them.

The party justified its opinion by sharing some numbers coming from several decisions made by European’s institutions.

This year, both the Swiss National Bank and the European Central Bank have reduced their key interest rates below zero, only to realize it hindered their banking and insurance companies financial health.

Two weeks ago, the ECB announced it would stop its multi-trillion bond-buying program at the end of December, marking a crucial turning point in President Mario Draghi’s term.

But for the opposition, this might not be all – Donald Trump might have personal interests at stake.

Has the Fed made Trump lose money?

Back in America, some Trump opponents say that the President might have lost five million dollars since the rates hike. According to Bloomberg, the President’s net worth could have dropped “about seven percent over two years”.

Source: Mortgage documents, U.S. government disclosures

As a matter of fact, the President is said to have 13 loans, including five over $50 million in value. While Bloomberg affirms that eight of them are at fixed rates ranging from 3.25% to 5.5%,  the interests have increased since the President took office, which would explain his worth loss and his vivd reaction.

Nonetheless, Donald Trump’s reaction came as a surprise to the Federal Reserve is supposed to be politically independent and has never been under so much critics by the highest executive power. According to the Washington Post, Powell only followed Trump’s advice from a few months ago.

Former Fed vice chairs Alice Rivlin and Alan Blinder described Trump’s comments as “highly unusual”. The President’s statement was not only criticized by the opposition, but by a wider range of politicians, as it broke with decades of traditions where presidents did not to comment publicly on the Federal Reserve, as to respect the institution’s independence.

playbook 2019
Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.