Fed disobeys Trump tweet, lifts funds rate

The US Federal Reserve disobeyed the Commander-in-Chief this morning and raised its funds rate target range another quarter percent, to 2.25-2.5% – the fourth rate hike of the year.

That’s up from a range of 1-1.25% in November 2017.

President Donald Trump had tweeted yesterday: “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

The background

The Fed supposedly makes its decisions independently, although its members are nominated by the president. Today’s decision was very independent. Confronting the central bank’s open market committee as it made its interest rate decision overnight NZ time, US sharemarkets slumped early in the week but rebounded ahead of the Fed decision, made on Wednesday afternoon local time.

The Wall St Journal ran an editorial on Tuesday laying out reasons for the Fed to pause from its recent pattern of quarterly rate increases, a view Mr Trump obviously concurred with. The newspaper also ran a story that day questioning a basic of Trump ideology (he’s an interest rates low, asset prices high kind of guy). In that story, the Wall St Journal said Mr Trump’s tax cuts had boosted growth & jobs (specifically, it lifted a quarterly gdp return which Mr Trump could highlight to show he was improving the economy), but questioned the cost, saying: “The deficit has ballooned, and most of the benefits went to corporate profits rather than employees.”

Against the background of petulant ‘Me-me-me!’ criticism, the Federal Reserve’s debt is money owed – money issued in repayable securities.

The US Debt Clock website shows US national debt racing towards $US22 trillion – it’s about 7½ days from rolling past $US21.9 trillion. Through its quantitative easing programme, the Fed built up treasury stock of about $US4.5 trillion in its attempts to maintain economic equilibrium in the wake of the global financial crisis that began 11 years ago, and its method of reducing that debt mountain is to cancel bonds instead of rolling them over. It’s now cancelling up to $US30 billion/month of Treasury securities & $US20 billion/month of agency mortgage-backed securities as they mature, instead of rolling them over – hence Mr Trump’s Twitter reference to “Stop with the 50 B’s”.

Through that programme, the Fed has reduced its debt mountain by about $US400 billion. But a quarter-percent raise in the interest rate will add $US55 billion/year to the national debt, apart from its other impacts.

In today’s statement, the Fed made no mention of its debt reduction programme.

The Fed release on its decision:

“Information received since the Federal open market committee met in November indicates that the labour market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation & inflation for items other than food & energy remain near 2%. Indicators of longer-term inflation expectations are little changed, on balance.

“Consistent with its statutory mandate, the committee seeks to foster maximum employment & price stability. The committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the committee’s symmetric 2% objective over the medium term. The committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic & financial developments and assess their implications for the economic outlook.

“In view of realised & expected labour market conditions & inflation, the committee decided to raise the target range for the federal funds rate to 2.25-2.5%.

“In determining the timing & size of future adjustments to the target range for the federal funds rate, the committee will assess realised & expected economic conditions relative to its maximum employment objective & its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial & international developments.”

Links:
Federal Reserve Board & Federal Open Market Committee release economic projections from the December 18-19 FOMC meeting
Wall St Journal, 18 December 2018: The Trump Tax cuts boosted growth & jobs, but at what cost?
Wall St Journal, 18 December 2018: As Fed begins meeting, Trump again calls for no rate increase
US National Debt Clock
Market Watch, markets page

Earlier stories:
2 December 2018: The debt clock pounds on, Trump & Xi use different decks of cards, Lagarde wants illusions to come true
1 December 2018: US debt level pushing fast towards $US22 trillion, and a look into Fed deliberations
3 August 2018: Fed to pull $US40 billion/month out of market

Attribution: Fed release, Wall St Journal, Twitter, US Debt Clock.

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