Sharemarket investors were initially excited about Donald Trump’s return to the White House. Fed chair Jerome Powell quickly became the party pooper.
Financial markets had been pricing in an 80 per cent probability of a rate cut at the next meeting of the US Federal Reserve Board on December 17 and 18. After Powell, the Fed’s chair, gave a speech in Dallas late last week, the odds shrank to less than 60 per cent.The sharemarket, which had gained almost 4 per cent in the week after the election, fell 1.3 per cent on Friday, with an index of the biggest tech stocks tumbling 2.7 per cent.
The sharemarket, in its initial reaction to the Trump trifecta – control of the White House, House and Senate – was focused on Trump’s plan to extend and increase his 2017 tax cuts for companies and wealthy households, when they would otherwise expire next year, as well as the pervasive deregulation he envisages.
Powell’s comments highlight the tensions in the Trump agenda between those policies that would boost the economy and inflation and those that would detract from growth and depress inflation. The Fed is data-driven, so it won’t respond until it better understands what the net effects of that agenda are, although it would be rational for it to be cautious in the meantime.
Interest rates were negligible – the Fed was targeting a range of 0.5 to 0.75 per cent for the federal funds rate – inflation was low and the government debt in public hands was less than $US20 trillion . The S&P 500 index was about 2365 points when he was inaugurated.
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