Skip to comments.How The Federal Reserve Is Setting Up Trump For A Recession
Posted on 03/15/2017 2:57:09 PM PDT by HomerBohn
Most Americans do not understand this, but the truth is that the Federal Reserve has far more power over the U.S. economy than anyone else does, and that includes Donald Trump. Politicians tend to get the credit or the blame for how the economy is performing, but in reality it is an unelected, unaccountable panel of central bankers that is running the show, and until something is done about the Fed our long-term economic problems will never be fixed. For an extended analysis of this point, please see this article. In this piece, I am going to explain why the Federal Reserve is currently setting the stage for a recession, a new housing crisis and a stock market crash, and if those things happen unfortunately it will be Donald Trump that will primarily get the blame.
On Wednesday, the Federal Reserve is expected to hike interest rates, and there is even the possibility that they will call for an acceleration of future rate hikes:
Economists generally believe the central banks median estimate will continue to call for three quarter-point rate increases both this year and in 2018. But theres some risk that gets pushed to four as inflation nears the Feds annual 2% target and business confidence keeps juicing markets in anticipation of President Trumps plan to cut taxes and regulations.
During the Obama years, the Federal Reserve pushed interest rates all the way to the floor, and this artificially boosted the economy. In a recent article, Gail Tverberg explained how this works:
With falling interest rates, monthly payments can be lower, even if prices of homes and cars rise. Thus, more people can afford homes and cars, and factories are less expensive to build. The whole economy is boosted by increased demand (really increased affordability) for high-priced goods, thanks to the lower monthly payments.
Asset prices, such as home prices and farm prices, can rise because the reduced interest rate for debt makes them more affordable to more buyers. Assets that people already own tend to inflate, making them feel richer. In fact, owners of assets such as homes can borrow part of the increased equity, giving them more spendable income for other things. This is part of what happened leading up to the financial crash of 2008.
But the opposite is also true.
When interest rates rise, borrowing money becomes more expensive and economic activity slows down.
For the Federal Reserve to raise interest rates right now is absolutely insane. According to the Federal Reserve Bank of Atlantas most recent projection, GDP growth for the first quarter of 2017 is supposed to be an anemic 1.2 percent. Personally, it wouldnt surprise me at all if we actually ended up with a negative number for the first quarter.
As Donald Trump has explained in detail, the U.S. economy is a complete mess right now, and we are teetering on the brink of a new recession.
So why in the world would the Fed raise rates unless they wanted to hurt Donald Trump?
Raising rates also threatens to bring on a new housing crisis. Interest rates were raised prior to the subprime mortgage meltdown in 2007 and 2008, and now we could see history repeat itself. When rates go higher, it becomes significantly more difficult for families to afford mortgage payments:
The rate on a 30-year fixed mortgage reached its all-time low in November 2012, at just 3.31%. As of this week, it was 4.21%, and by the end of 2018, it could go as high as 5.5%, forecasts Matthew Pointon, a property economist for Capital Economics.
He points out that for a homeowner with a $250,000 mortgage fixed at 3.8%, annual payments are $14,000. If that homeowner moved to a similarly-priced home but had a 5.5% rate, their annual payments would rise by $3,000 a year, to $17,000.
Of course stock investors do not like rising rates at all either. Stocks tend to rise in low rate environments such as we have had for the past several years, and they tend to fall in high rate environments.
And according to CNBC, a coming stock market correction could be just around the corner:
Investors are in for a rude awakening about a coming stock market correction most just dont know it yet. No one knows when the crash will come or what will cause it and no one can. But whats worse for most investors is they have no clue how much they stand to lose when it inevitably happens.
If you look at the market historically, we have had, on average, a crash about every eight to 10 years, and essentially the average loss is about 42 percent, said Kendrick Wakeman, CEO of financial technology and investment analytics firm FinMason.
If stocks start to fall, how low could they ultimately go?
One technical analyst that has a stunning record of predicting short-term stock market declines in recent years is saying that the Dow could potentially drop by more than 6,000 points to 14,800″:
But if the technical stars collide, as one chartist predicts, the blue-chip gauge could soon plunge by more than 6,000 points to 14,800. Thats nearly 30% lower, based on Fridays close.
Sandy Jadeja, chief market strategist at Master Trading Strategies, claims several predicted stock market crashes to his name all of them called days, or even weeks, in advance. (He told CNBC viewers, for example, that the August 2015 Flash Crash was coming 18 days before it hit.) Hes also made prescient calls on gold and crude oil.
And hes extremely concerned about what this year could bring for investors. The timeline is rapidly approaching for the next potential Dow meltdown, said Jadeja, who shares his techniques via workshops and seminars.
Most big stock market crashes tend to happen in the fall, and that is what I portray in my novel, but the truth is that they can literally happen at any time. If you have not seen my recent rant about how ridiculously overvalued stocks are at this moment in history, you can find it right here. Whether you want to call it a crash, a correction, or something else, the truth is that a major downturn is coming for stocks and the only question is when it will strike.
And when things start to get bad, most of the blame will be dumped on Trump, but it wont primarily be his fault.
It was the Federal Reserve that created this massive financial bubble, and they will also be responsible for popping it. Hopefully we can get the American people to understand how these things really work so that accountability for what is coming can be placed where it belongs.
Not only is the American economy on life support and has been for many years now, but the world's economy is in much worse shape. The Fed is the culprit here. When all should be economically sound, this group of eggheads will throw a wrench into the cogwheel of progress.
All Soros and his colleagues have to do is pull the switch and voilà , it will happen. The global elites will not be defeated. They are not going to give up the fight, especially since Trump, his staff and a large swath of Americans are pushing back against their evil deeds.
Small increases in the federal funds rate will not tank the economy. The expected stimulus will vastly overreach this monetary policy.
Too easy to foresee. Let’s hope Trump has already put great minds on this, because a recession may be the only correction available for the false Obama bubble.
The problem is serviciing the $20 Trillion National Debt.
THIS too will Backfire , big time !
“And according to CNBC, a coming stock market correction could be just around the corner”
One of the first problems here is they are quoting C-NBC...nothing but crap. It’s propaganda.
That should have been anticipated by issuing 30 yr bonds.
Really don’t believe the Federal Reserve has the type of power described. Interest rates were low following the economic catastrophe of the Iraq and Afghan wars compounded by the anti capitalist regulations and policies of the Obama administration because the economy was quite dormant. There was little demand for capital since there was little real economic growth . The demand for capital was low ( hence low interest rates) as was the demand for industrial commodities such as copper, aluminum, steel and oil. If Trump follows through with the rescinding of Obama’s anti capitalist regulations and taxes, lowers the Federal budget deficit and ends the war on carbon energy sources, the economy will grow. There will be a demand for capital, so interest rates will rise despite the agonizing meetings and musings of the Federal Reserve. The economy will expand and Trump will benefit politically.
Try can try
Not really. The FED is trying to restore sanity one quarter point at a time. Crony capitalism had to be cut back eventually.
If the $600 Trillion Derivative bomb goes off, then Katy bar the door.
Mark Faber (aka Dr. Doom) predicts it could be as much as an 80% crash, as that is how overvalued he sees this market.
But what do I know?
Not much, but the more I read, the parallels between today and 1929 are poignant and striking.
This increase will probably causes businesses to make purchases of the large variety as they see the cost of money is going up and its time make the outlays. This will cause growth in manufacturing as well as most other sectors offsetting the conventional wisdom negatives of increasing the rates.
I remember, right after the end of WWII, the general thinking was that the U.S. would slide back into a ‘30s-type Depression.
What they failed to realize was that people had TONS of money socked away because they couldn’t buy many consumer goods. Once the War ended and consumer production began, the economy took off.
I’m thinking somewhat along those lines now, despite the debt burden. Corporations sat on their money because of obama’s anti-business policies, and now that the White House is fumigated, that money will be put to work.
Zero Hedge had an article within the past week that in October (when Hillary was supposed to win) and the projected 4th Q GNP was pretty good that they were going to keep rates low in 2017. Since then, forecasted 4th Q growth rates declined (which means you don’t raise rates) and Trump won.
We should audit the Fed. It is part of the swamp.
A Trump E.O. would create other currencies, such as,
U.S. Note, Texas Dollar, North Dakota Dollar,
JFK Red Seal dollar.
This is a simple solution to the fed reserve.
Not an economist, nor did I sleep in a Holiday Inn Express last night but how does consumer confidence and general market optimism factor in? Everyone I talk to recently are now bullish on America and optimistic that Trump could be “the guy” to pull it all together. Some are talking fresh mom and pop start-ups if Trump can make deregulation happen, even if the capital costs them more when they decide to jump in than it might today.
There is ALWAYS the possibility of anything...........
People get rich over words such as "Possible", "Maybe", "Potential", "Could"..........
Wish I could figure out how to cash in on that crap........
Let’s not forget, the carbon tax and other BS regulations led to many household energy bills to go up 50% or much more. Get this back to pre-0bama destructive days and that is a nice small bump in spending income for every household in America.
Add in cheaper energy alternatives like coal and natural gas and everyone’s household energy bills could even be cheaper prior to Destruct-0bama. Take this times millions of homes across the US and that is a nice little bump for our economy.
The Fed will raise rates to crater the economy and the RINOs in congress will help by refusing to give Trump the antidote in the form of the tax cuts he wants.
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