Federal Reserve Chairman Jerome Powell ignored President Trump’s warnings to raise the U.S. federal funds rate to 2.25-2.5%. The latest hike marks the fourth time this year that the Federal Reserve have moved to raise the borrowing rate.
Trump had commented before the Fed meeting that the board should be cautious before, “they make yet another mistake.” Trump fears that the rate hikes are coming too fast and could derail the strong economic growth that his policies have driven with the President also stating that, “…the Fed has gone crazy”.
The swift rise in U.S. rates is another sign of out-performance versus the rest of the world. European rates are stuck at zero and the weak economy and government debt loads mean that the ECB are trapped. The continued rise in rates also makes U.S. debt more attractive to foreign investors and risks a rise in the dollar- something that emerging markets have been fearing due to their large exposure to U.S. dollar-denominated debt.
The reasons for the hawkish strategy by the Federal Reserve is likely twofold. In the event of another global recession, the Fed would have no room to reduce interest rates and stimulate the economy. The other reason is the pensions system. Corporate and state pensions schemes are seeing increased shortfalls and low bond returns have seen many funds chasing yield in risky debt or stocks. The Fed also knows it would have been blamed for blowing a bubble in the stock market and has moved to take some steam out of the U.S. stock indices.
Trump and the rest of the world want the Federal Reserve to halt the rate rises but they seem keen to proceed and the market expects another two-to-three rate hikes in 2019.