What Trump’s tirade against ‘loco’ Fed means for the markets

President Donald Trump’s branding of the Federal Reserve’s policy actions as “crazy” and “loco” following Wednesday’s steep stock-market selloff seemed both shocking and inevitable. The question for investors is whether it will make any difference at the Fed.

So far, analysts seem to doubt the remarks, the latest and strongest in a series of criticisms of the central bank’s gradual tightening of monetary policy, will have much impact.

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In fact, for much of 2018 the U.S. economy has ignored a turn in the global economic cycle, leaving U.S. equities unfazed by falling emerging-market equities and currencies, said Kit Juckes, global macro strategist at Société Générale, in a note.

Also see: Why one economist says Trump is right about the Fed

“This week has seen the S&P, and the Nasdaq, sit up and pay attention to what’s going on. The president’s criticism of the Fed adds color, but no real substance to the situation. It has long been assumed by market participants that when global market malaise finally transfers to the U.S., the Fed will pay attention and the dollar’s rally will start to run out of steam.”

Trump, responding to the market selloff Wednesday afternoon, said that monetary policy is “so tight. I think the Fed has gone crazy” and doubled down on the comments in a later interview with Fox News, saying he wasn’t happy with the Fed. The central bank “is going loco and there is no reason for them to do it,” he said.

Trump has criticized the Fed several times in 2018, but Wednesday’s strong language even surprised investors who have been critical of the Fed.

“There is no doubt in my mind that this panic is all about Federal Reserve interest rate policy…The president should have chosen a better term than crazy (or as he also referred to the Fed as loco) but his sentiment is 110% correct,” wrote Scott Rothbort, president of LakeView Asset Management, in a note.

The Dow Jones Industrial Average DJIA, -3.15% and the S&P 500 SPX, -3.29% both fell more than 3% on Wednesday for the worst one-day percentage decline since February, while the tech-heavy Nasdaq Composite COMP, -4.08% slumped more than 4% in its worst one-session skid since the U.K. voted to leave the European Union in June 2016. Stocks in Asia and Europe tumbled Thursday and U.S. stock-index futures pointed to further declines for Wall Street.

Trump has touted the stock market’s bull run over the course of his first term. Previous presidents were often reluctant to explicitly tie stock-market gains to policies out of fear that they would be saddled with the blame for downturns. In his remarks, Trump dismissed suggestions the selloff was triggered by trade tensions with China.

Meanwhile, many investors have argued that recent equity market weakness is the result of a sudden pickup in long-dated interest rates, with the yield on the 10-year Treasury note TMUBMUSD10Y, +0.09% topping 3.26%, a more-than-seven-year-high, earlier this week. Yields and debt prices move in opposite directions.

Michael Every, senior Asia-Pacific strategist at Rabobank, said the market action—and the White House’s reaction—merely show that even though unemployment sits at a multidecade low, the world is still addicted to the postcrisis combination of “high and higher asset prices and low and lower interest rates.”

“It’s a sign of those kind of times when a daily stock rally of 3% is taken as a given, while a daily fall of the same amount requires an official White House statement that this is merely a bull market correction and that ‘the fundamentals and the future of the U.S. economy remain incredibly strong,’” Every said.

Trump’s frustration also comes amid expectations the Fed, under Chairman Jerome Powell, wouldn’t be as quick than it was previously perceived to be when it comes to reacting to stock-market weakness.

Investors have talked of a Fed safety net in some form or another at least since the October 1987 stock-market crash prompted the Alan Greenspan-led central bank to lower interest rates. Figuratively dubbed the “Greenspan put,” it was later referred to as the “Bernanke put,” after his successor Ben Bernanke, following the Fed’s aggressive monetary-policy actions in the wake of the financial crisis. It eventually gave way to the notion of a “Yellen put,” in reference to Powell’s predecessor, Janet Yellen.

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An actual put option gives the holder the right but not the obligation to sell the underlying asset at a set price, serving as an insurance policy against a market decline. Central bankers dismiss the notion of any sort of a “Fed put,” arguing actions are driven by concerns about financial stability and their economic mandates.

Mohamed El-Erian, chief economic adviser at Allianz, told CNBC in a Wednesday interview that the market “has to realize that this is a different Fed.”

“The Fed put, as people like to call it, is way out of the money now,” he said, and argued the Fed would be reluctant to change course given solid prospects for the U.S. economy for the next two years thanks to strong business investment, rising household income and supportive fiscal policy.

Some observers have argued that criticism of the Fed could even be counterproductive, with central bankers more likely to stick to a tightening path out of fear of the perception that their independence has been compromised.

”The fall in equity markets could put some pressure on the Fed, but the comments from Trump are probably in themselves working in the other direction. Indeed, as central bankers sometimes put it, ‘we are like whipped cream—the more you beat us the harder we become,’ said Christin Tuxen, chief analyst at Danske Bank, in a note.

Others, such as LakeView’s Rothbort, held out hope that the Fed would back off.

“We have a saying on Wall Street to not fight the Fed. The fight may have begun but I hope that the Fed learned its lessons from the past and lays its gloves down,” he said.

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