Politics

A Look at the Federal Reserve in a Trump Presidency

Chairwoman Janet Yellen of the Federal Reserve raised interest rates by a quarter point for the first time in a year and just the second time in the last decade. The Federal Reserve has kept interest rates at near zero for the length of President Obama’s term, begging the question “was this a political move?” At her press conference Wednesday, Yellen stated,  “Our decision to raise rates should certainly be understood as a reflection of the confidence we have in the progress the economy has made and that it is expected to make.” Yellen expects rates to rise to as much as 3% by 2018. Democrats have touted the economy under President Obama as a booming success, with unemployment at 4.9% and 15 million jobs created since 2010. However, these numbers do not tell the whole story, as the Department of Labor will not count you as unemployed if you have given up finding a job over a 4-week period.  If you are paid at least $20 at a minimum of 1 hour of work in a week’s span, you are not officially unemployed. Many citizens are working part time and are not able to switch to full time as many companies are being forced to either fire employees or cut hours due to Obamacare costs. Here are a few key statistics about the current state of the economy that President-elect Trump is tasked to improve on per the Census Bureau and the Treasury Department:

  • Lowest Labor Participation Rate Since the 1970s
  • Almost 95 Million Americans Out of The Labor Force
  • Lowest Home Ownership Rate in 51 Years
  • Almost 13 Million More Americans on Food Stamps since 2009
  • Over 43 Million living in Poverty
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Trump warns that we are in a “big, fat, ugly bubble”

President-elect Trump predicted a rate hike before he were to take office and that we are currently in a bubble. Said Trump: “As soon as Obama retires and ‘goes out to the  golf course’ the Fed will raise rates.”

I agree with President-elect Trump that Chairwoman Yellen has been playing politics when it comes to setting the interest rates to help keep the economy artificially inflated to make President Obama look better. The Fed has been saying for years a rate hike was imminent and now we are finally getting one on the eve of a Trump presidency. Raising rates was absolutely the right move, it just came too late, and fortunately the market has already priced in the change. With higher interest rates, the general rule is stocks become less attractive as yields on fixed investments become more competitive. However, since the expectation of a hike was expected, people are still confident investing in stocks. The Federal Reserve has been printing money like crazy and using methods such as quantitative easing to try and spur economic growth. With interest rates so low, savers have been hurt, and though it was a good time for first time home-buyers to receive a good mortgage rate, they simply do not have the money to do so. President-elect Trump will have his hands full dealing with the economy and the stock market. With the mounting debt and deficit, the government must recover and they achieve this by raising rates and strengthening the US dollar to keep in line with inflation. This will eventually lead to a downturn in the equities market and more people moving into bonds to avoid the growing inflation and market uncertainty. Trump can get past this by sticking with his plan to lower taxes and regulations across the board. If business owners and individuals playing the stock market are optimistic about earnings and future growth outlook, concerns of inflation will get overlooked. Experts and analysts expect the Dow Jones Industrial Average to surpass a major milestone by passing 20,000 points. Since the nomination of Mr. Trump, the market has been in a “yuge” market rally, setting career highs. “Corporate tax cuts could easily add 5% to 7% to profits annually going forward,” writes Jonathan Golub, chief equity strategist at RBC Capital Markets. “A tight labor market and an increase in consumer and business optimism should fuel this trend higher.” Like Mr. Golub, many others share the sentiment that the bullish market should continue as the buzz around a Trump led economy continues positive results.

So, could Trump theoretically abolish the Fed?

The Federal Reserve as it stands is too big and powerful to just completely get rid of as soon as possible. The dollar would collapse, immediately losing much of its value, and everyone’s savings accounts would be wiped. Over a longer period, it could certainly happen, as the use of a central bank in the United States has not always been in place. From 1863-1913, National Banks were used with those banks printing their own currency. The financial crisis that happened during those years were actually less severe than those during the existence of the Federal Reserve. For example, the United States Mint could go on printing money under the guidance of the Treasury secretary, who would track the growth in the money supply to gross domestic product growth. The fed is supposed to be a last resort to US financial institutions. As they state on their website, one of their primary objectives is to guide the United States around recessions by controlling the nation’s monetary policy and credit conditions.

A more plausible approach than completely wiping out the central bank would be to bring more accountability to the Federal Reserve with a yearly audit. The idea of auditing the fed is definitely something all conservatives should get behind. No one agency should have that much power without being subject to scrutiny. Senator Rand Paul (R-KY) has been leading the charge in trying to get an audit done of the Federal Reserve, but he has yet to get legislation passed. Talking about the Fed, Paul said “It is no secret that the Federal Reserve’s unchecked printing press causes recessions and increases income inequality. Allowing the Fed to inflate our money supply will artificially keep interests rates low, but at what cost? Their acts can no longer go unchecked, which is why I am proud to carry forth my father’s original ‘Audit the Fed’ legislation, which will receive a vote in the Senate in early January.” Congressman Thomas Massie (R-KY) re-introduced the Federal Reserve Transparency Act in the House. Transparency is key, and the Federal Reserve should be no exception. The market and private sector should be driving the economy, not politically-driven  bureaucrats.

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“The Fed is, indeed, a political, oligarchic force, and a key part of what looks and functions like a banking cartel.”
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