Can Political Pressures Divert Federal Reserve’s Primary Focus?

With the strengthening of the US economy, lower unemployment as well as wage growth, the Federal Reserve is left with no option but increase the interest rates as the fear of increased inflation looms. The equity market players are more concerned about the inflows and outflows from the markets which directly impacts their portfolio values. Whenever the Federal Reserve raises the interest rates, it adversely affects the equity markets as the Fed’s move makes the debt markets more attractive which fuels the outflows from the equities resulting in huge sell-off. Recently, we saw how higher interest rates negatively impacted the global equity markets and particularly the US technology stocks. A fall in the technology stocks generally leads to the fall in the broader markets. The tech stocks were the preferred choice of the short sellers, so they can apply brakes on the losses which they were encountering because of the global downtrend in the markets. However, recently the US markets did witness positive momentum because of the robust earnings season. This factor could temporarily help the markets but not permanently.Â

However, the US President Donald Trump is completely against the Federal Reserve’s decision of raising the rates and believes that these moves negatively impacts the broader economy as it results in an outflow of capital as well as it also discourages lending activities. Easier the lending conditions for the business and consumer, higher will be the economy’s growth as this leads to strong investments and increases the spending behavior. The US President criticizes the Fed because it was his economic policies as well as trade measures that the US economy is witnessing the robust momentum. However, Federal Reserve needs to check inflation and hence, adopting the measures of raising the interest rates. It seems like the Federal Reserve would be raising the interest rates by considering several parameters like inflation rates, robust labor market conditions as well as favorable US economy.

The Federal Reserve views that it would continue to what it seems right for the broader economy and it needs to be treated separately from the political space. The Federal Reserve has already raised the interest rates thrice in 2018 and the market players anticipate that one more hike would be hitting the markets when the apex bank meets in December. This clearly showcases that the Fed has decided to go on the path of quantitative tightening and is hawkish on the monetary policy. Apart from the reasons mentioned above, the Federal Reserve is also considering rate hikes because of increased corporate borrowing as well as asset values. The Fed is also concerned about the inflation increasing its target range because of the price growth. The tightening of the labor markets leads to an increase in the salaries which, in turn, increases the inflation.

However, the global growth and positive business environment would get impacted by the Trump administration’s decision of the slapping tariffs on the Chinese imports. This argument was even supported by the report from the International Monetary Fund or IMF.

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