US President Donald Trump renewed his criticism of the Federal Reserve this weekend by tweeting that “if the Fed had done its job properly, which it has not, the stock market would have been up 5000 to 10,000 additional points.” Elsewhere, European Central Bank (ECB) President Mario Draghi expressed concern about the Fed’s independence, saying that he was “certainly worried about central bank independence” especially “in the most important jurisdiction in the world.”
Despite the criticism, we don’t see Fed policy as having either been detrimental to equity market performance or influenced by political pressure.
- The S&P 500 has rallied by 24% since December’s low and is only 1% below last September’s all-time high. Presumably, Trump’s comments refer to the Dow Jones Industrial Average, which is comprised of just 30 stocks, more than 40% of which, by market weight, are industrials or information technology stocks particularly vulnerable to US tariffs.
- December’s equity sell-off was triggered in part by fears that, with growth slowing, the Fed would remain on "auto-pilot." But with the Fed shifting to a “patient” neutral stance in the first quarter, fears of a policy mistake appear to have receded. 10-year inflation expectations are currently 1.96%, which suggests that bond investors view the Fed’s current stance as appropriate to meet its 2% inflation target.
- Trump’s choice of potential nominees for two vacant Fed seats has been criticized by some as being politically driven rather than based on monetary policy experience. But even if both were appointed, this would not necessarily change the course of policy, which is decided on by the entire Federal Open Market Committee. Trump, while criticizing Fed chair Jerome Powell, has also reportedly admitted he can’t replace him.We currently don’t expect the Fed to change rates this year. With growth reverting toward trend and inflation close to target, there is little economic reason to move rates – irrespective of political pressure.