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FED surrenders to Trump?

No one is shocked by Donald Trump’s harsh statements about the “erroneous” and “catastrophic” monetary policy of the Fed. During the entire presidential term, there were not a single month so that Trump has not brought down streams of criticism against not only the Fed, but also personally against Chairman Jerome Paul. So last week, the US president compared the Fed chairman with a stubborn child who does not want to admit his mistakes. The main requirement of Trump to the members of the Fed Committee was and remains an immediate reduction in rates, and stimulating the growth of capital inflows into the American stock market. Trump has repeatedly stated that his success or failure as president of the United States can be measured by the growth dynamics of the Dow Jones index. In general, this does not surprise anyone any more, especially since all such attacks, Fed representatives have always endured stoically and commented with great sarcasm.


However, a 180 degree u-turn in the confident rhetoric of Jerome Paul at the last committee meeting was totally unexpected!


According to the statement, the Fed not only admits the possibility of lowering rates in 2019, but actually admits that the pace of rate increases over the previous period may have been too hasty.

Financial markets got this statement as a firm intention to lower rates in July and rushed up. However, did investors understand the real intentions of Paul? According to the analytical department of FortFS, the committee has few real reasons for reducing the rate. Despite the fact that the inflation rate is slightly below the target of 2%, it is still much higher than the critical level of 1.5%. The labor market is still strong and the unemployment rate is around the minimum historical values. The combination of these factors, as the Fed has repeatedly stated, indicates that the US economy does not need artificial stimulation. 


So, why would the Fed lower the rate?


Consequently, it can be assumed that the abrupt change in the Fed's policy is caused either by tremendous pressure on the committee members by the presidential team, or it is a step in favor of investors and Wall Street tycoons. Anyway, both assumptions play in favor of Trump and fits his plan.


And despite the fact that the market laid a 95% chance of reducing the rate by a quarter point in July, we believe that the Fed’s true intentions may not be so obvious.


Firstly, Jerome Paul's message that the Fed is ready to intervene if necessary and stimulate growth does not oblige to do anything. In fact, the markets have already responded with rapid growth after this statement, and this is all looks like the verbal intervention provoked by Trump's pressure. So, the Fed has already placated Trump.


Secondly, this statement gives Paul more flexibility by opening up the possibility to act contrary to the previously announced course, if necessary, while not shocking the markets.


Thirdly, if the resolution of the trade conflict with China is more or less successful, and this is exactly what we see at the G 20 summit in Japan, and the markets will continue to grow, this will enable the Fed not to change its course and announce that the economy of the USA is developing in the right direction, incentives are not needed and previous rate hikes were the right decision!


Thus, the analytical department of FortFS believes that the abrupt change of Jerome Paul’s rhetoric is nothing more than a political maneuver and an attempt to win time before making a decision whether to meet Trump’s demands or stick to the old course. We believe that despite the fact that the likelihood of a rate cut has indeed increased, the markets overestimate the likelihood of such event occurring. The first half of July will show the real sentiments on the stock markets after the G 20. Based on this, will be possible to predict further steps by the Fed.

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