Under one scenario, Fed raises rates and tangles with Trump

The Federal Reserve finally appears poised to deliver the interest-rate increase U.S. corporations and the financial markets have been waiting for all year.

The Federal Reserve finally appears poised to deliver the interest-rate increase U.S. corporations and the financial markets have been waiting for all year.

Ironically, though, doing the very thing so many voices have clamored for could eventually bring the central bank into sharp conflict with Donald J. Trump after the businessman takes office as the nation’s 45th president in January.

As Akin Oyedele noted in a Business Insider report, Trump’s plan for substantial spending to repair the nation’s infrastructure could cause inflation to rise more quickly than it otherwise would. If that occurs, the Fed’s response probably would be to increase the pace of interest-rate increases.

If it does, says Luke Bartholomew, a fixed-income investment manager at Aberdeen Asset Management, "there’s a good chance that Trump might view that as an attempt to undermine his plan, given how hostile he’s been towards the central bank. That could lead to a showdown between president and central bank, which financial markets would not take kindly," Bartholomew said in an interview with Business Insider.

After Friday’s jobs report — 178,000 new positions and an unemployment rate of 4.6 percent (even if people leaving the job market helped to push the rate down) — investors are more convinced than they have been all year that the central bank’s policy-making committee will approve at least a modest rate increase at its Dec. 13-14 meeting.

Reuters said the chances of a rate hike were put at 95 percent after the jobs report, based on the CME Group’s FedWatch tool. The Fed would be taking the step despite the way worker pay has languished in the years since the Great Recession ended.

"I think at 4.6 percent people have to question at what point are we going to see those wage increases," Heidi Learner, chief economist at Savills Studley in New York, told Reuters.

Average hourly earnings fell 0.1 percent in November after rising 0.4 percent the previous month, the Labor Department said in the jobs report.

Nonetheless, consumer confidence has been climbing. The Conference Board said last week that its Consumer Confidence Index for November rose to 107.1, its highest level since July 2007.

“Consumer confidence improved in November after a moderate decline in October, and is once again at pre-recession levels,” Lynn Franco, director of economic indicators at The Conference Board, said in a statement.

“A more favorable assessment of current conditions, coupled with a more optimistic short-term outlook, helped boost confidence. And while the majority of consumers were surveyed before the presidential election, it appears from the small sample of post-election responses that consumers’ optimism was not impacted by the outcome. With the holiday season upon us, a more confident consumer should be welcome news for retailers.”

Stephen Stanley, chief economist at Amherst Pierpont, told MarketWatch that there is a natural increase in optimism after an election.

“This campaign was so acrimonious that having the election over may have had people feeling better,” he said.

Consumers were certainly buying cars and trucks in November. Buoyed by sizable discounts, auto sales rose 3.7 percent for the month, to an annualized rate of 17.9 million. Autodata said trucks and sport utility vehicles were 59 percent of new-vehicle sales in November, up from 55 percent a year earlier.

Reuters said the results left the industry within reach of its annual sales record, which occurred in 2015.

“All economic indicators show significantly improved optimism about the U.S. economy, including consumer and business sentiment, which continue to drive a very healthy U.S. auto industry,” Mustafa Mohatarem, chief economist at General Motors, told Reuters. “We believe the U.S. auto industry is well positioned for sales to continue at or near record levels into 2017.”

Today we will see reports on factory orders for October and third-quarter productivity. On Wednesday the Fed will issue its report on consumer credit for October, and on Friday the University of Michigan will release its preliminary Consumer Sentiment Index for December.

Like the Conference Board’s index, the University of Michigan reading has been trending upward, and the fresh report will tell us more about how consumers are responding to Trump’s election victory.

As the Associated Press reported, the November jobs report shows that Trump is going to inherit the kind of economy that frustrated Barack Obama. Hiring is steady, and the jobless rate is low, but it’s declining, in part, because some of those who are out of work have given up and stopped looking for a job.

Trump’s administration will be challenged to extend the benefits of job growth to include many of those who feel left out.

"With the unemployment rate this low and wages rising, now is the real test of whether a stronger economy can bring people back into the job market," Jed Kolko, chief economist at job hunting website Indeed, told AP.


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