(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Jan 5 After the rest of the world underestimated
Donald Trump's chances, the Federal Reserve now risks crediting
the next president with too much power.
Reacting in substantial part to what it anticipates will be
stimulative policies by the incoming administration, minutes
from the Fed's December policy meeting, released on Wednesday,
pointed to a faster and steeper pace of interest rate hikes.
Trump, it would seem, is capable of what the combined might
of the world's central banks has been unable to do: stoke
inflation. A highly skeptical view is in order, both of his
reach and his grasp.
The minutes paint a picture of a more hawkish Fed than Janet
Yellen portrayed in her remarks following December's 25
"There are a number of warning balloons sent up that go
beyond Yellen's press conference comments. The key shift in (the
Fed's) thinking is that fiscal stimulus changes the meaning of
'gradual', changes the definition of easy/tight financial
conditions, and changes equilibrium values for rates," Steven
Englander, economist at Citigroup, said in a note to clients.
While the minutes make many nods to the multiple
uncertainties in the situation, it's worth noting that "a
couple" of participants expressed concern that the Fed's
signaling of a gradual firming may be taken as a "commitment to
only one or two rate hikes per year".
Several of the discussants said a steepening path of rate
hikes might also raise the issue of what the Fed does with the
money it gets as bonds in its portfolio mature and are paid
back. That mention of balance-sheet management is the first of
"Many participants judged that the risk of a sizable
undershooting of the longer-run normal unemployment rate had
increased somewhat and that the Committee might need to raise
the federal funds rate more quickly than currently anticipated
to limit the degree of undershooting and stem a potential
buildup of inflationary pressures," the minutes said.
The Fed is rolling up its sleeves and preparing to get out
in front of an expansion spurred by fiscal policy. A "sizable
undershooting" on unemployment, if it happens, would constitute
an outright failure by a central bank unless, of course, the
rules have changed.
They likely have not, and surely won't for a president
making the kinds of noises about tariffs that Trump is, at least
as the Fed is currently constituted.
After the shock of his election it is only natural that
people, in the markets and in the Fed, will take Trump's bombast
a bit too seriously. That's not to say that he won't try to do
what he says but a much higher discount than normal should be
applied both to his intentions and his power.
Here is a bit of context, courtesy of David Rosenberg,
economist at Gluskin Sheff: the core goods group of the consumer
price index will likely turn in its tenth straight month of
year-on-year decline when December's figures come out.
"It will be interesting to see how Trump on his own is going
to pull the inflation rabbit out of the hat - how he will do
what seven years of large-scale money supply growth from
Bernanke and then Yellen could not," Rosenberg wrote to clients.
"So the markets seem to think that Trump will manage to
bully his way to get what he wants, but history tells us that
even the most effective presidents don't get more than 60
percent of the campaign planks through."
Getting Congress to go along with corporate tax cuts and
stimulus spending which will take debt-to-GDP above 100 percent
is a difficult task. And if we've learned anything in this past
eight years it is that expanding debt has, above a certain
level, diminishing returns on economic growth. Trump can't
If we discount the likelihood of expansionary fiscal policy
then we're left with the parts of the Trump manifesto which tend
to cause inflation but stifle growth: immigration controls and
On both scores there may be more Twitter grandstanding,
aimed at individual companies and driving the short-term news
cycle, than actual policy changes.
And the Fed, of course, faces its own communications
challenge. It needs to send a signal that it stands ready to
tighten more rapidly, but it will be operating in an environment
with more noise than at any time since 2008.
Markets, up until recent days, have been big believers of
Trump's impact: driving interest rates up and discounting higher
Whatever hawkish gestures it feels it must make, the Fed
should treat an unprecedented president with unusually high
Cheer up, much of it may never happen.
(Editing by James Dalgleish)