The Federal Reserve is at loggerheads with President Donald Trump after pushing through an interest rate rise with more expected in 2019. Donald Trump has been extremely dismissive of the move, a view which seems to be supported by stock markets and money markets. So, what does the future hold for US interest rates and has the Fed got it wrong?
Short-term economic growth
The Fed believes the US economy will expand by around 3% in 2018 although it will slow in 2019. However, on the back of a belief there is long-term strength in the US economy the Fed believes that the recent interest rate rise is “fully justified”. Indeed, have already been suggestions that we can expect another two rises in 2019. Suggesting a policy which of “data dependency” there are concerns the Federal Reserve is ignoring international issues which could have a serious impact on the US economy.
Stock market investors
You only need to look at the recent fall in leading US indices to see the disdain which investors have expressed to the recent rise and suggestions for more of the same in 2019. As you would expect, the tech sector has been hit harder than most leading to a serious erosion of the long-term premium tech stocks tend to attract. We have also seen a recent sea change in views about the US property market with forecast for 2019 and 2020 significantly reduced, with further downside expected.
It is no secret that cheap finance in the US, and indeed across the rest of the world, has been behind the recent recovery in the US economy. Markets have bounced back stronger than many had expected from the 2008 economic downturn. However, many investors have seemingly forgotten the massive debts built up by governments during a difficult decade since the crash. Historically the property market has been central to all Western economies, so any reduction in house price growth will have a direct impact upon the domestic economy.
Concern and confusion
US politicians and the Fed have been at loggerheads in years gone by, this is nothing new, but Donald Trump has taken this to a new level. Politicians are often forced to take a short-term view to curry favour with voters while the Fed takes a more pragmatic approach. To see a president so vocal about his disdain for the Fed and its ongoing policy of increased interest rates does not help the situation. All parties need to pull in the same direction, for the good of the US economy, not create an environment of concern, confusion and potential political instability.
Difficult short-term outlook
The fact the Federal Reserve has also confirmed a policy of further interest rate rises in 2019 could be curtailed at relatively short notice, does not help future forecasts. Yes, we should expect the Fed to react to economic changes but the fact it is currently going against the markets, with further rises expected, diminishes the influence of the Fed. There is a strong argument that US stock markets had pushed ahead too far too quickly in light of Donald Trump’s inauguration. Some would suggest he has failed to deliver, others will point at political point scoring, but ultimately the markets have performed very well indeed. Is this just an excuse for short-term profit-taking?