Trump-Federal Reserve Showdown?

DOW 20,000!


Today was a big day for US equities with the DOW hitting 20,000 points for the first time in history. Moments after its opening on Wednesday, the DOW reached 20033.77 points, following the market rally after Donald Trump’s official inauguration.

Dubbed the Trump Bump, the market rally is due to investors believing that Trump’s promised ramp-up of infrastructure spending together with deregulating industries and cutting corporate taxes will give the US economy a big boost in the near future.

However, it’s interesting to observe that the very aggressive one trillion dollars infrastructure plan was proposed yesterday by the congressional DEMs, not by President Donald Trump.

It looks like the Democrats are trying to retake the initiative or there may be something else, i.e. President Trump reached a deal with the DEMs considering his own party’s reluctance when it comes to public works etc.  As I wrote yesterday in a similar article, historically speaking, Republicans despised this type of jobs-works program as being just another big government waste of money and resources.

Another interesting fact to consider is that despite the Nasdaq, S&P 500 and the DOW hitting historic highs, the volatility was basically crushed, making for the quietest 4 year period ever in the stock market and that’s due to FED’s “helicopter money” policy (cheap money and quantitative easing) for the last 15 years or more, combined with only 2 rate hikes this cycle, amounting to 3 quarter points in 2016.

Janet Yellen, FED’s current chairman had a change of heart recently, as she was stating prior to the elections that letting the economy to run hot for a while would be a good idea,as in advantageous. A few months later, Yellen performed an 180 and she now thinks that’s a bad idea.

Donald Trump accused the Federal Reserve during his election campaign of holding rates down in order to make Obama’s “economy” look good by boosting stock prices. And if Obama looked good, Hillary looked good.

Donald Trump is now President and Wall Street will have to deal with the harsh reality sooner rather than later, after Janet Yellen’s abrupt change of heart. In case you don’t understand what I am talking about, the FED promised 4 more rate hikes in 2017 and their next monetary policy meeting will take place at the end of the month.

The question is, will the FED raise rates again in a sort of political payback against Donald Trump’s claims regarding FED’s bias? Why has Janet Yellen adopted a sudden hawkish stance?

With Democrats playing along Trump’s infrastructure spending plans, a rate hike from the FED will make for a serious threat to the GDP growth figures The Donald needs to pay for his fiscal relaxation without increasing the national debt.

Source: CBS