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What Happens Inside the Beltway With Trump Will Sway Wall Street

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Thursday, 25 May 2017 12:29 PM Current | Bio | Archive

The Federal Open Market Committee (FOMC) minutes make it clear that the U.S. central bank intends to raise interest rates in June.

The minutes state: “The Committee expects that economic conditions will evolve in a manner that will warrant gradual increases in the federal funds rate … Policymakers noted that preannouncing a schedule of gradually increasing caps to limit the amounts of securities that could run off in any given month was consistent with the Committee’s intention to reduce the Federal Reserve’s securities holdings in a gradual and predictable manner as stated in the Committee’s Policy Normalization Principles and Plans.”

This is important for investors because it gives insight into how the Fed’s bond holdings should be reduced.

Markets expect there is a 100 percent probability for a rate hike in June while another rate hike this year has a 47 percent probability.

The FOMC meeting on June 13-14 could be interesting. After that meeting, the central bank will issue its “Summary of Economic Projections” and Fed Chair Janet Yellen will hold a news conference.

That gradual approach of allowing bonds to roll off the Fed’s balance sheet makes it now reasonably clear that the Fed will commence with the so-called passive program of quantitative policy tightening during the second half of this year, which should be looked at as an imminent policy shift, which is of course important for markets and investors.

This is completely the opposite to what ECB President Mario Draghi said yesterday. "There is no reason to deviate from the indications we have been consistently providing in the introductory statement to our press conferences, which all read, 'we decided to keep the key ECB interest rates unchanged. We continue to expect them to remain at present or lower levels for an extended period of time, and well past the horizon of our net asset purchases," he said.

The intention to pre-announce an escalation of tightening of the overall Fed’s monetary policy may be a subtle attempt by the Fed to insure itself in the hypothetical case President Trump should fire Yellen and replace her with someone that wouldn’t necessarily represent a continuation of Yellen’s prudent way for setting the course of the Fed’s policy.

Meanwhile, the world of U.S. politics intrudes into U.S. thinking with a special election for a congressional seat in Montana. Trump won Montana with a 20 percent lead last year. 

While the consensus view is that the Republicans will retain the seat, it will be the margin of victory that will be closely looked at.

Maybe it’s worth for taking notice that some GOP strategists are whispering in private: “This race is closer than it should be,” which is a completely unusual situation for the State of Montana.

Trump influence on the Republicans in Congress rests in large part on his ability to help members in Congress for being re-elected. Now, if, and that’s a big if, Trump would be seen as an electoral liability rather than an electoral asset, then Trump’s credit in the Republican caucus in Congress will be reduced.

The special congressional election in Montana, much like the president’s overall approval ratings will shape market perceptions about the viability of the Trump political agenda.

When we look back at the Iran-contra story in the mid-80s or the Lewinski scandal in 1998-1999, both events had big impacts on for example the dollar, which experienced a sizable slide on both occasions.

Investors shouldn't be ignoring U.S. political stories. Savvy investors know to keep a sharp eye on how things will play out “Inside the Beltway.”

This is honestly all about perceptions and not about real economics, but such emotions can eventually sway the stock market. Especially when the market notoriously doesn't like uncertainty, surprises or unexpected "Black Swan" events.

Let’s wait and see what comes out of the election in Montana.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments.

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HansParisis
Investors could do well not negating the U.S. political stories and because of that keep an eye on how things will further play out “Inside the Beltway.”
Beltway, Trump, Wall, Street
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2017-29-25
Thursday, 25 May 2017 12:29 PM
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