Did the Fed Raise Rates Because of Trump?

The Federal Open Market Committee (FOMC) released its latest statement on monetary policy.  The Federal Reserve, as expected, hiked its target rate by 0.25%.

From late 2008 to December 2015, the target rate was in a range between zero and 0.25%.  Last year, the range was hiked to 0.25% to 0.50%.  With this latest hike, the range is now 0.50% to 0.75%.

We say that the Fed raised rates, but it really only raised one rate.  This is the interest rate paid on reserves to commercial banks.  Banks will now get paid 0.75% to park their customers’ deposits at the Fed.  This is the bank bailout that nobody wants to talk about.

The banks are getting paid to not lend.  This is deflationary in a sense, as it keeps the Fed’s base money from multiplying through fractional reserve lending.

The hike in the federal funds rate is not deflationary in terms of the monetary base.  It is essentially neutral.  In previous and more normal times, the Fed would likely have to sell assets in order to raise its target rate.  This would be nearly impossible today, as the banks have piled up trillions in excess reserves.

That is why the Fed has to pay a higher interest rate to the banks.  It essentially sets a floor on the federal funds rate, which is the overnight borrowing rate for banks.  Most banks don’t need to borrow overnight because they already easily meet the reserve requirements.

If this is not clear, just know that the Fed’s hike in its target rate (the federal funds rate) is mildly deflationary.  In terms of the adjusted monetary base, the Fed has already kept that stable (or mildly deflationary) over the last two years.

With the FOMC statement came the projection that the Fed expect economic growth of 1.9% in 2016 and 2.1% in 2017.  These are really lackluster numbers when compared to historical data in the United States, but even these estimates may be way too optimistic.

It is also projected that the Fed will increase its rate three more times in 2017.  I would be very surprised if this actually happens.  Any indication of negative growth or a significant downturn in stocks will quickly wipe away this prediction.

While this quarter-point hike was widely expected going into the meeting, there have been expectations of hikes for the last two years.  The Fed was originally supposed to raise rates 4 times in 2016.  Instead, we got just one at the very end of the calendar year.

Did Janet Yellen and company at the Fed do this because Donald Trump is set to take the presidency?  After all, Trump was quite critical of Yellen during the few times he talked about the Fed during the campaign.  Is the Fed trying to send Trump a message?  Is the Fed trying to purposely implode the economy?

Overall, I don’t think this is likely.  Even if Yellen and several other Fed officials don’t like Trump, they aren’t going to purposely shoot themselves in the collective feet.  If the economy implodes, it brings into question their own legitimacy.  Trump will just hit at them harder too.

I think this rate hike likely would have happened even if Trump had not won the election.  And most people aren’t thinking this far ahead, but Yellen may be doing Trump a big favor by hiking its target rate now.

What are the chances that there isn’t going to be a recession within the next 4 years?  I would say the chances are quite remote.  And if that is the case, it is better to have a recession sooner rather than later, particularly from Trump’s perspective.

If the economy goes into recession now or sometime in 2017, Trump will get a pass.  There will always be critics no matter what happens, but the majority of people won’t blame him.  If a recession happens in 2018, it becomes more questionable.

If a recession happens in 2019 or 2020, then Trump is toast in the next election in all likelihood.  The Republican majority in Congress will also be finished.

If there is going to be a recession with a big drop in stocks, it is better for it to happen soon from Trump’s point of view.

During the press conference, Yellen stated, “So I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.”  This is actually proper Keynesian economics, as opposed to modern-day Keynesians who support more debt and spending no matter what the economy looks like.

The original position of Keynes was that the government should cut back on its debt during the good times.  At least Keynes and the original Keynesians got it somewhat right part of the time, as opposed to the Paul Krugmans of today who get it wrong almost all of the time.

Yellen’s position that we do not need stimulative fiscal policy now is in opposition to Trump.  While it may be for the wrong reasons, perhaps Yellen is more correct on this front, at least in terms of government spending.

In conclusion, we have to remember that Yellen probably possesses more power than Trump right now in terms of impacting the economy.  She will continue to have more power in this respect as long as she is the Fed chair.

Meanwhile, if there are any signs of economic turmoil with falling stocks or lower-than-expected GDP numbers, then expect the Fed to back off of further rate hikes.  And then don’t be surprised if the possibility of “QE4” starts to get thrown around in conversations.

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