The Federal Open Market Committee (FOMC) voted to keep its key target interest rate unchanged. There were two dissenting votes who wanted to raise the rate by 25 basis points. This decision comes less than a week before the big mid-term elections.
Some might claim that this is the Federal Reserve staying out of politics. But you could make that claim with any decision. It is almost always seen as helping one candidate or one party over another, even if the decision is to do nothing.
It is Donald Trump who is pleading for lower interest rates. He isn’t shy about saying that he is a low interest rate guy.
Yet, the two biggest things Trump has done have led to this slightly tighter monetary policy. Trump’s tariffs (taxes) have increased the prices of products being imported, or in some cases, have reduced the number of products being imported. In other words, Trump’s tariffs have made things more expensive for the American consumer.
Trump’s foreign policy, particularly with Iran, has also led to higher prices in some areas, most notably energy. The prices for oil and gas are much higher than they otherwise would have been had Trump not started a war with Iran.
Even when it comes to Ukraine, Trump is blaming Ukraine for striking at Russian energy facilities and driving up the price of diesel. Even if that’s the case, it is Trump who has continued to fund Ukraine with money, weapons, and intelligence.
These two Trump policies (tariffs and war) have directly led to higher prices for Americans. Because of this, the Fed is not sure how to handle the price inflation, but they are leaning towards higher interest rates to help bring the rate of price inflation down.
Post Election
Trump has strongly suggested that he might attack Iran again after the mid-term elections. But if Iran is such a great threat, why would he wait? Iran obviously isn’t a threat (if not attacked), but Trump doesn’t want to attack again before the elections because it would cause even more chaos and drive oil prices even higher.
Likewise, the markets are giving something like an 85% chance that the Fed will hike its target rate in the December meeting. But why wait? If inflation is a problem right now, why are you waiting another 6 weeks to hike rates and tackle the inflation problem? Why wouldn’t you just hike rates now in the October meeting?
By trying to be seen as not political, the Fed is actually being political. Trump is just more blatant about it, like almost everything else.
What’s Ahead?
Trump’s approval rating is at all-time lows. On economic matters, 65% of Americans say they disapprove of the job he’s doing. This means that the Democrats are going to win big next week. They are likely to take majorities in both the House and Senate.
Liberty lovers might be a little optimistic that this will provide some gridlock. When it comes to spending, that probably isn’t going to happen. Most of the government spending is essentially on auto pilot. The one place where it could be cut easily is on foreign adventurism. But what are the chances that the Democrats will actually not fund the wars of choice by Trump?
Maybe if Trump is wrapped up in investigations and impeachment proceedings, then he will have less time on his hands to think up other wars. But that’s not necessarily the case.
The one good thing about a big Democratic victory will be the feedback to other Republicans. Most Republican politicians are scared of Trump. They don’t want to get on his bad side. Look at what happened to Thomas Massie.
But realization is going to set in that Trump is now highly unpopular, and some Republicans are going to start to stray from Trump and perhaps even be a little critical of him.
On the economic front, it is impossible to say what will happen. The debt is growing at a staggering pace, and this is during a time when unemployment is still low and stock indexes are doing well.
Higher interest rates are a big threat because people are over leveraged and the government is beyond that. Higher yields mean higher interest payments on new debt that is issued.
If we hit any kind of significant downturn or financial crisis, just wait to see what kind of socialist policies the Trump administration pulls out. The so-called Democratic socialists are a big threat, and they are very wrong on economic issues, but it is hard to not roll your eyes at the big-spending Republicans who scream socialism about the Democrats.