Friday, 5 April 2019

Is Trump Crazy on Interest Rates?

The media agrarians are now pushing the line of: "If the economy is so strong, like you boast, Mr. President, then why should the Fed cut interest rates?"

The line, and the others similar to it, are meant to suppose that either the economy is not really strong, and the President is a liar (like every politician to ever bless a crowd), or that it is strong and the President is an imbecile, who doesn't understand a lick of economics.

The reality is that Fed has been on a psycho-spasm of nine consecutive rate hikes the moment Trump was elected (which just ended in December with one final 25bps hike) after not raising rates even once for ten consecutive years. 

If the Trump Bump is "fake" and just a "sugar high," (as the Ministry of Truth tells us every day) then why would the Fed suddenly hike nine consecutive times after not hiking once over a ten-year period? Makes no sense whatsoever. No other central bank raised rates.

What happened to "global central bank coordination"?

The Fed can't point to anything to explain its actions, so it's fair to conclude the actions were political/anti-Trump... If that's the case, they ought to return to their previous policy of "central bank coordination," wherein which all central banks move interest rates up or down in unison, not just the Fed.

Why have all central banks stood pat on interest rates (other than little brother Canada that just follows the Fed) while the Fed hiked nine consecutive times?

Because raising rates slows economic activity... So what did Fed's actions do to the U.S. economy?

Slowed it down. So the U.S. is technically overbought on interest rates, compared to the rest of the world.

When it comes to economics, everything is relative—and interest rates are just a reflection of inflation. Nominal rates mean nothing on their own. So when you see Trump's economic advisor saying the Fed needs to cut interest rates, while rates are at 2.75%, always consider both the current rate of inflation and central bank rates in other developed countries (primarily the ECB and BOJ). If the real interest rate (nominal interest rate - inflation rate) is at or near 0%, there's nothing to see/nothing out of the norm. If they begin to deviate from zero percent, then there's something to discuss (and a potential trading opportunity).

When interest rates were at 15%, what do you think inflation was at? 15%. So real interest rate = 0%.

Now that interest rates are at 2.75%, what do you think inflation is at? Just about 2.50-2.75%. So the real interest rate is just about 0%.

Why most governments have a monetary policy that keeps real interest rates at 0% is different subject and a discussion for another day.