Fed’s Rate Hikes Are Really A Bullish Validation Of Trumponomics | Stock News & Stock Market Analysis – IBD

Fed's Rate Hikes Are Really A Bullish Validation Of Trumponomics | Stock News & Stock Market Analysis – IBD.

by Investor’s Business Daily · March 15, 2017
Monetary Policy: As widely expected, the Fed on Wednesday announced a quarter-point rate hike, and then said it would likely raise rates twice more this year and three times next year. And yet the stock market rallied. Why would that be?

Like most things with markets, the answer is highly complex and not easily distilled to one or two things. But the simplest answer seems to be that the Fed is so far behind the curve on interest rates after a decade of zero-percent rates that the markets now see any move upward as a return to reason and normalcy for the central bank.

On the surface, the Fed’s decision to raise rates is a nothing-burger. It takes the benchmark fed funds rate only to the 0.75%-1.00% range, a level that is almost negligible compared to the past norm for interest rates. By way of comparison, from 1992 to 2017, a period of abnormally low interest rates, the fed funds averaged 2.74%.

And that may be the point.

Investors know that, with a change in the presidency, the economic future is likely to be much better than the recent slow-growth past, and they’re putting their bets on the table now.

The Fed’s measured, quarter-point hike is a signal that policymakers might have learned their lesson, and won’t make the same foolish mistakes that they did in the recent past. That’s why most market indexes on Wednesday closed near their highs for the day.

In recent decades, the Fed either cut rates too far, too fast, creating financial and housing market bubbles, or raised rates so fast and so far in one of their frequent mistaken panics over economic growth that the economy was brought to its knees. This is what happened both in the late 1990s and again in the mid-2000s, both times with major financial market meltdowns.

And the fact is, the economy was losing steam going into this year, before Donald Trump stepped into the Oval Office. Yes, it’s true, since Trump was elected the job-market has perked up, with February’s 235,000 new payroll positions a pleasant upside surprise. And business confidence is soaring.

But Obama-era economic growth rates provide no reason at all for rate hikes.

In the fourth quarter, Obama’s last as president, real GDP grew just 1.9%, which equaled the mediocre pace set for the entire year and for all of Obama’s presidency.

And the Obama slowdown is continuing into the first quarter. The Atlanta Fed on Wednesday slashed its widely watched and well-regarded “GDPNow” real growth estimate for the first quarter of 2017 from an estimated 2.5% rate just two weeks ago to just 0.9%, a number more in keeping with a recession than a healthily growing economy.

Even so, deciphering the Fed-speak in the central bank’s news release, policymakers appeared to be saying that no matter how slow things look now, they see a pickup in future growth. They’re not responding to the economy as it is now, but to how they think it will be in the future. The Trump economy.

“The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate,” the press statement said. “The federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. (italics ours)”

That’s bullish. For nearly three decades, the Fed has tried to keep its rates in the “sweet spot” between 2% and 5% or so, a little bit below the average level of nominal GDP growth. Even supposing that the Fed actually enacts five rate hikes of a quarter-point each over the next two years, as the Fed now suggests, that would still only bring the benchmark Fed funds rate to 2.25% — still way below the recent sluggish 3%-plus trend in nominal GDP growth.

In short, monetary policy will not be tight at all.

Meanwhile, market participants also know that the Fed’s rate hikes are, in a perverse way, a vote of confidence in Donald Trump. How so? His plans to deregulate, cut taxes and reform major parts of the government and ObamaCare will almost certainly lead to faster real economic growth than the 2% average during the Obama years.

Like everyone else, the Fed was going slow even last year. No hurry. After all, if Hillary Clinton had been elected as nearly everyone expected instead of Trump, it would have been Obama, Pt. II, The Sequel. Then Trump happened. That’s why the Fed has now hiked rates twice since November, and will do so at least two more times before year-end.

They know the deregulated, low-tax Trump economy will grow, and grow fast. There are going to be more jobs. They fear that strains will emerge on labor and raw resources, pushing inflation above their 2% long-term target. And they’re afraid of getting way behind the curve.

In short, the Obama era of slow growth is finally ending. Investors know that’s not a bad thing. As long as the Fed doesn’t push the growth-equals-inflation panic button and ratchet up interest rates, as it has in the past, the Trump economy’s future should be very bright indeed.

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