Fed’s Yellen Raises Rates & Warns Trump

On Wednesday, Federal Reserve chair Janet Yellen announced a rate increase of a quarter of a percentage point. This is the first rate hike in a year, and only the second increase in the last ten years. While some analysts were concerned about the implications of a Trump presidency on the U.S. marketplace, this decision by the Fed is a huge sign of confidence in the economy.

Fed’s Yellen Raises Rates & Warns Trump

 

Why Did the Fed Raise Rates?

After a decade of trying to turn around a recession, the Fed now turns its focus to fighting inflation. During the press conference following the announcement, Yellen also gave a prospective time frame for additional rate hikes. The Fed calls for eight or nine hikes spread out over the next three years.

Rate hikes have both positive and negative effects. When the rate is low, banks loan money out to more consumers. This leads to increased spending, which can drive up demand. Without an increase in supply, the end result is higher inflation. Inflation leads to higher prices, which can eventually cause economic growth to slow down. One of the Fed’s main jobs is to help control the economy by carefully balancing the rate of growth.

Will Janet Yellen Serve Out Her Term?

After explaining the new rate direction, Yellen made clear that, despite friction between her and Donald Trump, there was no truth to the rumors that she would resign her position. Yellen confirmed that she planned to stay in office until her term expires in 2018. She also stressed her commitment to keeping the Federal Reserve independent.

While Trump says that he has no desire to get into conflict with Janet Yellen she found many of her decisions to be overly political. Yellen herself agrees that she is unlikely to repeat the multi-administration bipartisan tenure of her predecessor, Alan Greenspan. Trump has already said he intends to appoint a more conservative Fed Chair once Yellen’s term is over.

Does Donald Trump Have a Point About Regulations?

In a statement that took some analysts by surprise, Yellen appears to agree with Trump that banks are being hurt by an excess of governmental oversight. She pointed to the Dodd-Frank Act which took effect after the 2008 economic crisis. “It’s important to look for ways to relieve the regulatory burden on community banks and smaller institutions,” she argued.

While the 2008 recession was kickstarted by the failure of several large banks, it is now the community banks and co-ops that are feeling the brunt of increased regulation. The additional costs associated with compliance drive down competition. Allowing smaller financial institutions to provide services without as many strings could lead to an improved lending environment for retail clients.

Do We Need Infrastructure Development for Employment?

Although the Fed has given the American economy a thumbs up, Yellen voiced concerns regarding President-Elect Trump’s stimulus proposal. While stating that she was not going to advise Trump or Congress regarding economic policy, she questioned the wisdom of the $1 trillion infrastructure spending plan the new administration hopes will provide more jobs. She noted “at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.”

One problem with the infrastructure plan is that the U.S. is already within sight of full employment. Trump’s advisors, professor Peter Navarro and investor Wilbur Ross, have promoted the plan. In theory, the tax revenue from the workers hired to repair the country’s roads, bridges, and railways will offset the expenditures. However, this work is normally done by skilled craftsmen.  This is not the typical profile of those who are currently searching for work. Some analysts have sounded the alarm that the plan is more likely to reshuffle workers, by encouraging them to leave existing jobs.

How will the Fed Increase Affect Trading?

All signs point to a strong U.S. economy for at least the next three years. The retail sector is currently waiting for the results of the current holiday shopping season. This will determine if inflation is a valid fear. The dollar and dollar-linked indices should continue to improve. With the improved economic stability gold prices will drop. Bank stocks should see growth, thanks to the increased profits that will follow the rate hike.