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Panic in the markets. Trump: Fed is crazy

11 Oct 2018 8:50|Marcin Lipka

In the last hours, blood was pouring on the markets. American stock market indices have lost 3-4 percent of their value. Similar drops were seen in Asia and will probably be repeated also in Europe. There may be many reasons for a dramatic discount, but Donald Trump has one of the most interesting explanations. It is the Fed, the American central bank is "crazy",” writes Marcin Lipka, Conotoxia Senior Analyst.

The longstanding boom on the American trading floors has led to a number of analyses that stock valuations could be too high. This may especially apply to some technology companies. In September, OECD (Organisation for Development and Economic Cooperation) pointed out in its economic forecasts that 10 years after the financial market crisis, risks are building up in the financial market. A graph of the Nasdaq technological index was shown on one of the slides of the presentation, depicted an increase of more than 200 percent since 2007.

It is difficult to find direct reasons for yesterday's and today's rocketing. These may be growing concerns about the slowdown in emerging markets or the risk of an expansion of the trade war between the USA and China. It is also possible that investors have already taken into account the good results of companies for the third quarter, which will be coming in the next few days.

Recently, the U.S. Treasury bond market has also become more and more competitive for shares. Increases in interest rates led by the Fed, which are aimed at reducing the risks of building up economic imbalances, make that American bonds offer interest rates that exceed 3%. The Federal Reserve's actions are highly desirable, but the US President Donald Trump is clearly not a fan of them. Why?

Crazy in English and Spanish

The American president has repeatedly suggested that his economic policy contributes to the bull on the market and without the changes introduced by the White House administration and Congress, which is dominated by the Republicans, there would be no growth. Thus, he claimed that the wealth of American citizens would increase.

However, this strategy has now theoretically boomeranged back with hiccups. Is the effect of lower taxes expiring too quickly and investors starting to fear about the trade war started by Donald Trump? Neither of these things. President Trump found the guilty party literally a moment after the closing of the New York Stock Exchange. It is the American central bank, the Fed.

During a short speech for journalists, Donald Trump said: "They are very restrictive. I think the Fed has gone crazy". This might seem like a slip of the tongue, as a reduction in confidence in the central bank by the executive may have negative consequences in the future. In addition, the Federal Reserve does not behave wrongly at all.

In the hours that followed it turned out that this was not a slip-up. In a telephone interview for Fox Business television, Donald Trump said: "The Fed is going wild. They are raising interest rates and it's ridiculous". In response to the suggestion that inheritances may be linked to a trade war, the U.S. President answered, "That's not the problem. The problem, in my opinion, is the Fed. The Fed is going loco”. It is difficult to say whether the Spanish "loco" was supposed to increase the scale of outrage…

Elections to Congress - the reason for the attack on the Fed

Direct interference in central bank policy is a serious matter. If this were to happen, it would significantly reduce the confidence of investors and entrepreneurs in the USA. It was in Turkey that President Erdogan, through his influence on the central bank, contributed to an increase in inflation to around 25% and 40% of the weakening of the Turkish lira during the year.

In the case of the United States, the country's institutions are strong enough to survive the pressure from the White House. President Trump's game is probably not so much about the actual reduction of interest rates by the Fed or a slowdown in their growth, as about the Congress elections scheduled for November 6.

Donald Trump will, therefore, try to maintain the narrative that the growth in the markets was the result of his good decisions, and the falls are the result of the actions of the Federal Reserve, which has simply gone crazy by raising interest rates. Will this strategy succeed? We will see in less than a month when the Americans choose the new composition of Congress.

11 Oct 2018 8:50|Marcin Lipka

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