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Federal Reserve

US Fed does right thing by raising rates

President Donald Trump may criticise the country’s central bank but he also has himself to blame for the global stocks sell-off by launching a trade war against China

PUBLISHED : Monday, 15 October, 2018, 5:52pm
UPDATED : Monday, 15 October, 2018, 11:00pm

US President Donald Trump has blamed the country’s central bank for causing the latest mini-crash in global stock markets, led by sharp declines on Wall Street. He has denounced the Federal Reserve’s regime in raising interest rates as “out of control”. Trump has taken credit for a buoyant US market ever since entering the White House. Now he is blaming someone else for its losses. This is entirely in line with his personality, but does not necessarily reflect economic realities. If there is a culprit, it’s not just rising interest rates, but the trade war he launched against China.

The Chinese stock markets and those in emerging economies with close trading ties to China have already been shaken. A push from Wall Street just makes things worse. Thankfully, the global markets seem to have found a footing, for now. There are also internal weaknesses that accounted for the recent sell-offs. In the United States, the tech giants had been stellar performers and, until recently, had led the decade-long bull run. But the so-called discount rates on their share prices had been moving in an unsustainable direction. A correction was reasonable.

Philosophically, the bond and stock markets are not just the difference between the trading of debt and equities. The bond market tends to punish irresponsible policies, whether from governments or companies, in relation to borrowings. The stock market is far fickler and often rewards irresponsible risk-taking.

US stocks slump as Trump blames ‘crazy’ Fed and traders urge against panic

Among mainstream economists, the signals from the US Treasury market and the global bond market in general justify the interest rate rises. In recent years, short-term rates, set by the Fed, have risen faster than long-term rates, determined more by market forces. This so-called flat yield curve means investors are sceptical about future growth to justify higher long-term rates. If you have an inverted curve, it means they anticipate a recession ahead.

But more recently, though, longer-term rates are rising faster, meaning investors have more confidence in the US economy. Bond traders also don’t seem to worry about soaring inflation. So it makes sense for the Fed to continue its rate-raising regime, and it also needs to exit its unorthodox monetary easing programme of the past decade. Thankfully, the US Fed is still politically independent.