Of Course Trump's Election Influenced the Fed

Look, no one smart was saying Donald Trump was likely to win on the morning of November 8th. Then he won. That meant all the norms and expectations of a Clinton Presidency went out the door, and a wholesale policy change was likely. He ran as an anti-Obama, she ran as his third term. She was a career politician, he was not. She was favored, he was not. Him winning meant some wholesale changes in how things were likely to get done.

Predictably, the Federal Reserve was being reactive at their first post-election meeting:

The Fed said in its minutes, which were released Wednesday, that its anticipated path of interest rates rose significantly following Trump's presidential win. And Fed economists said that investors seemed to be expecting the same. "Most of the steepening of the expected policy path occurred following the U.S. elections," the Fed staffers wrote in the notes that accompanied last month's meeting.

Yes, Fed members seemed convinced that Trump would push through some stimulus measures and that the economy would grow faster under Trump. But they also said Trump's policies increase the risk of higher inflation, and that if so, that would likely cause them to move faster in raising interest rates. The Fed's official statement said that the Fed would continue to increase rates at a gradual pace, although the so-called dot-plot released after the meeting showed Fed members had upped their prediction to three rate increases in 2017, from a previous two. 

When the economy is growing, the Federal Reserve is not a big fan of stimulus. New Presidents, coming in from a party that is out of power, tend to want to do stuff to keep the economy churning in the positive, because it's good for their politics. This is not anything new, and actually shouldn't cause huge alarms for the public, though it probably will because our new President will probably make a lot of noise about it. This is both no big deal, and a very big deal.

This is no big deal because it was to be expected. The Federal Reserve has been talking about rate hikes since 2015, and planned to do them anyway. This is the expected policy on their end in a growing economy, as they seek to cool down inflation fears. Job creation is up, wages are rising, and growth is strong. The Fed is doing the job it is tasked to do here.

Those conditions though are normally the conditions you re-elect the President's party and policies under. In a non-partisan, round-about way, this is the Fed's way of saying they aren't happy with the voters' choice. Essentially, rate hikes will dull the impact of Trump's stimulus, which will put them at odds with him from the outset. They are doing this because of inflation concerns from "over-heating" the economy. Knowing Trump, and his inability to be subtle, this is going to be a big problem. He is likely to react negatively, and cause chaos with the market. One of the other things the Fed said in their minutes, that is getting less press, was that some Board of Governors members thought the uncertainty around Trump could cause the economy to cool off a bit. They were probably foreshadowing these types of fights.

In short, don't be alarmed at the Fed. Be alarmed at the world you're living in.