Thursday, October 18, 2018

Trump vs. The Fed



Donald Trump has been causing eyes to roll in the economic community by taking on the Federal Reserve in a very Trumpian way.  "I think the Fed has gone crazy", said the President who appointed the current Fed Chairman, Jerome Powell.  Why is Trump doing this?  What is going through his mind?

Here's a guess: Donald Trump knows his economic history.

One of the untold stories of the financial crisis in 2008 is how the Federal Reserve under the very respected Ben Bernanke collapsed the housing market by raising rates too high and too fast.  Ben Bernanke became Fed Chairman February 1, 2006 when the Fed target rate had already been raised by Alan Greenspan to 4.25%. The day Bernanke became Chairman he raised the Target Rate to 4.5%, but he didn’t stop there. He kept raising until July 1, 2006 when the Fed Funds Target hit 5.25%.  So, from July 1, 2004 to July 1, 2006 the Fed raised its Target Rate from 1.00% to 5.25%, an increase of 425% in two years.  Imagine if food or gas went up by 425%!  Shortly thereafter the yield curve was negative and the rest is history.  

As of today, the Fed has gone from 0.25% to 2.25%, in under three years, an increase of 800%!  Granted, the percent increase means less when below the Goldilocks neutral interest rate and the denominator is so small, but respected Fed Chairmen have been "wildly" wrong about that before.   If Powell is wrong, 800% is crazy. 

And why does the Fed always do this when Republicans are in the White House?    

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