From his unprecedented announcement to pull troops from the middle east to his firings of high level administration officials, Trump leaves the American people on edge. Trump’s sporadic and anti-bureaucratic style of governance often leaves people struck with worry and shock over sudden shifts in policy.
Thus far, his announcements via Twitter haven’t directly affected the livelihoods of everyday Americans. Withdrawing troops from the middle east and firing the acting FBI director both have great repercussions, but none that will land squarely on the shoulders of the average American the following morning. However, Trump’s most recent attack on the independent US Federal Reserve Bank has led to repercussions that Americans feel on a daily basis. Stock values have plummeted following Trump’s tweets criticizing the interest rate hikes. Advisors reporting his desire to remove the bank chairman, and Trump’s open admission to reporters that he believes the Fed is in the wrong.
The stock market has seen some of its largest fluctuations in history ever since the spiral of rising interest rates and the attacks by Trump began. But are Trump’s fears of rising interest rates justifiable? Do rising rates actually imply bad news for the future of the economy? To be short, the answer to these questions is no.
Many speculate the motivation behind Trump’s fears is that government bonds and savings accounts become more intriguing as interest rates increase. As investors move money over to risk-free assets, corporate profits dwindle. But historical trends prove the exact opposite of what Trump is fretting over. Throughout the past 50 years, rising interest rates almost always concur with market gains. Since 1969, there have been 11 interest rate hikes and 10 of those periods saw aggregate returns for stock holders actually increase. Some experts argue that economic growth is bound to slow down/lessen in periods of interest rate hikes. So although returns are still increasing, they’re no longer increasing at such high rates. This hyper-economic growth is exactly what the Fed hopes to counter, as at this point the growth is so fast it threatens the value of the US dollar.
In countering inflation, or even potential inflation, the Fed is actually helping retain the merit of the current and/or former market gains. If growth continues but currency value decreases, then any further market gains aren’t as valuable as they may seem.
Whether Trump’s worry is of dwindling corporate profits or a slowed-down rate of economic growth, neither have enough credit to be worthy of such drastic counteractions. Trump’s attempts to use another word these rate hikes have been dangerous and even ironic. When the president goes after the head of the largest independent monetary financial institution in the world, the stock market reacts. Trump sees the actions of the Fed as harmful to the economy, so he reacts by trying to prevent any more action from them. Last month, Trump’s tweet attacking the Federal Reserve resulted in the worst Christmas eve the stock market has ever had, dropping more than 2.7%. The irony is that as Trump attempts to counter the Federal Reserve and boast about American companies, he’s actually worsening the state of the stock market.
The unfolding saga of Trump and the American economy this holiday season took another unexpected turn when Trump’s Treasury Secretary, Steve Mnuchin, called a meeting with America’s largest banks. With top executives and financial regulators, Mnuchin asked if banks were having any liquidity issues. All responded, as indicators show, that there are no issues with banking liquidity. Atlantic editor Annie Lowrey perfectly depicts the situation as a patient with a runny nose being repeatedly told by her doctor that she doesn’t have cancer. The patient never considered cancer in the first place, but now she’s thinking she may have it. The weird timing of the call points to the doing of Donald Trump. From his tweets, inquiries into removing the Fed chairman and promotion of Mnuchin’s meeting, Trump is continuing to tell a healthy American economy it doesn’t have cancer. Maybe this will finally be the time Trump feels retribution for his sporadic style of governance, or maybe not.