If president Trump was a savvy business man when he was a private real estate investor he certainly isn’t showcasing his talent in the political arena. Chief corporate executives quit the manufacturing & Strategy & Policy forum which strongly appears to be in protest over Trumps defending of far-right protesters at the Charlottesville rally. It’s clear that President Trump is becoming unpopular among corporate leaders, the American people but also within his own Republican party which can prevent him from implementing fiscal policy plans.
President Trump moved the financial markets last week while his popularity, or the lack of it, can influence it by not implementing his promises of lower taxes and fiscal stimulus. When Trump won the elections, the markets rallied, buoyed on his promise of more investment, he took full credit for the S&P reaching all-time highs. Nevertheless, as his own party members oppose his decisions he will be will become less capable of introducing more stimulus, one would argue that current stock valuations are a far cry from their fundamental value which is alarming.
What’s peculiar is that Trump criticised Janet Yellen for keeping rates lows when “there are bubbles everywhere” yet he wants to introduce more stimulus which is a conundrum this analyst can’t grasp. Many have speculated over when Janet Yellen will leave the chair and perhaps there is reason to believe that she has a few more hikes in her before she does, getting rates above 1% while they have been at near zero for almost ten years signals a good job, right?
On Wednesday, the July FOMC minutes were released as the markets took a dovish message from it, for clarity this suggests that rates won’t increase, however as we dive deeper we see a mixed message as regards inflation. Is the sluggish inflation data transitory? If so perhaps normalisation should continue, it’s almost as if we splashing water on a heating volcano. Or perhaps inflation is not responding to low unemployment, a hot topic of discussion currently.
Fed policy member Mester is of the opinion we should continue to normalise despite weak inflation, in a recent interview Mester outlines “I’m not one who would like to see inflation be at 2 percent before we continue on the path”, perhaps an exaggerated statement as there is reason to believe that another hike is in store if we see any sign of inflation. However, this is a consistent message from the Federal Reserve, one may ask why are we hiking rates when inflation is low. This comes down to raising rates now or else raise them more aggressively in the future which could be damaging, hence “gradual increases”. If weak inflation is transitory while rates are left unchanged this scenario could materialise.