Mnuchin: Trump respects Fed but likes low interest rates

The Federal Reserve is not pleasing President Trump with its policy on interest rate increases

The sudden sell-off can be explained in large part by looking at the bond market.

The Dow plunged almost 832 points on Wednesday, the third-worst point decline in history.

But for all the stock market palpitations and risks to particular interest-rate sensitive industries, the message to take from the recent rise in interest rates is an unambiguously good one: This expansion may have some life in it yet. Even Amazon (AMZN) dropped 6%.

While it's unusual for the United States president to publicly bash the Fed, many investors agree that fears of higher interest rates are partly responsible for the volatility.

Trump's comments and the stock slide "won't be enough to prevent the "crazy" Fed from raising rates again in December", Capital Economics analysts wrote on Thursday after the last consumer price data, which, while slightly below expectations, were still roughly in line with the Fed's plans.

The Federal Reserve has repeatedly pledged to raise rates only gradually.

For much of the last couple of years, short-term interest rates, which the Fed controls directly, have risen much faster than longer-term rates, which are set based on global supply and demand for bonds. Then the Central Bank takes such decisions.

The central bank had raised the benchmark lending rate, which affects everything from mortgages to auto loans to bond yields, just twice before Mr Trump took office in January 2017, after a campaign in which he criticized the institution for allegedly keeping rates near zero in a bid to help his opponent. Investors are anxious that their investments will be less profitable over time if inflation picks up. A year ago, it stood at 3.91 percent.

The median forecast of FOMC officials in September called for interest rate increases to continue into 2020, rising from 3.1% at the end of 2019 to 3.4% at the end of 2020. "That means that whilst we initially saw bonds and stocks sold off in lockstep, we are now seeing bid for bonds as investors seek those attractive yields".

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Rather than berating the Fed, the president should look to his own misguided economic policies, particularly free-trade stifling tariffs. Facebook (FB), Netflix (NFLX) and Twitter (TWTR) all fell sharply on Wednesday.

"No, I think it's good", the president told reporters Wednesday. But the only one actually trying to turn us into Venezuela is Trump. Even worker wages are finally showing signs of life after idling for most of the recovery that followed the housing crash. On Wednesday, Trump said, "The Fed is going wild".

He described the path of rate increases - most recently to a level of 2-2.25% - as "crazy", adding that the stock market reaction was the "correction that we've been waiting for".

In other words, it's full steam ahead for the Fed.

Traditionally, presidents have avoided publicly commenting on Fed policy. "It's so tight. I think the Fed has gone insane", Trump told reporters as he arrived for a campaign rally ahead of the U.S. mid-term elections. "If the economy slows we can adjust to that". Washington is borrowing heavily to pay for the corporate tax cut and a surge of government spending. The value of America's money has been greatly diminished since the creation of the Fed. Third-quarter S&P 500 earnings are projected to soar by 20%.

"I think the fundamentals are still very strong".

In effect, higher mortgage rates could depress the rate of price appreciation of houses, as homebuyers cannot bid as aggressively for properties as they could when rates were lower.

Christine Lagarde warned that a "full-blown commercial war" could shrink global trade by almost 18 percent and also hamper global GDP, with the United States, China, and others finding themselves on the losing end.

The tit-for-tat tariffs threaten to hurt business confidence and delay investment. Despite that, we're doing very well but it's not necessary, in my opinion. That won't help jittery investors.

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