Editorial, Featured

Trump Says Federal Reserve’s ‘Gone Crazy’ Because He’s a Massive Debtor

October 12, 2018

By Arturo Castañares / Publisher and CEO

The stock market took a dump this week with the Dow losing more than 1,300 points and the S&P 500 dropping for six straight days.

Most analysts attribute the losses to rising interest rates after the Federal Reserve again raised its federal funds rate, triggering most other interest rates to tick up. The Fed has raised interest rates eight times since 2015.

While rising interest rates may sound like a bad thing, it’s actually a sign of strong economy and low unemployment, two key figures that President Trump often touts as being a result of his presidency.

So, then, why would Trump criticize the Federal Reserve for raising rates if it proves the economy is doing well? Let’s start with what the Federal Reserve is, and how it affects rates.

The Fed, as it’s known, is an independent government agency that controls our money supply in the US. It controls the Federal Funds target rate, which sets the cost that banks charge each other for short overnight loans.

Basically, as the federal funds rate goes up, all other interest rates do, too, including bank loans and credit card rates.

After the 2008 Great Recession, the Federal Funds rate was reduced to zero, and remained there until 2015 to help spur an economic recovery.

In December 2015, the rate ticked up to 0.25%, then again one year later to 0.50%.
Over the next two years the rate increased to 2.25% when it was last changed in late September.

That latest increase is what has caused the stock market to drop, as interest rates on government bonds also rose and became a safer investment than speculative stocks.

Now that 30-year treasury bond rates are paying around 3.35%, they are attracting risk-adverse investors away from the volatile stock market.

But, why does the Fed raise rates?

As the economy has recovered and grown at record-high levels over the past few years, the threat of inflation has becomes a real concern. If the economy gets too over-heated, prices rise and the things we buy become more expensive. That’s inflation.

The current inflation rate is 2.3% over the past 12 months, which is higher than last year’s 2.1%. That growing inflation number worries the Fed, so it raised interest rates to put the brakes on the economy just

a little bit by making money more expensive for businesses, including loans and lines of credit.

Keeping inflation down is important for consumers because it would immediately cause prices of goods we buy to become more expensive, but wages would not increase as quickly, so our real buying power would be diminished.

If goods at Wal-Mart become more expensive, it immediately takes a big bite out of shoppers’ wallets.

The President shouldn’t be for higher store prices, right? Then why would he criticize the Fed’s interest rate hike?

Well, the downside of higher interest rates is that the cost of borrowing money goes up, sometimes by more than the fractional point increase of the federal funds rate.
If you are someone that borrows huge sums of money, then higher rates will cost you more money.

Enter Trump, the business man, not the President.

Even without reviewing his income tax filings, it is well documented by his financial disclosures that he and his businesses, which he solely owns, owe up to $400 million to banks and other lenders, making him a huge borrower. For the past ten years, Trump has enjoyed record low borrowing costs that have saved him tens of millions of dollars.

As interest rates increase, so does the cost of corporate debt.

Just for fun, let’s see how the new rates would impact a large borrower like Trump.
Taking into account the 2% rate change that has already occurred over the past two years, the annual interest on $400 million of debt would have increased by over $8.3 million. With another .25% increase expected next month, the overall annual debt payments could increase another $1 million.

That may not seem like a lot, but over the next ten years, that could cost Trump $18.5 million more in debt payments. That’s not nothing.

So, for the first time in modern history, the President of the United States is an active businessman, with hundreds of millions of dollars in outstanding debt. We have never, in the over 100-year history of the Fed, had a President that had such a vested interest (no pun intended) in the outcome of Fed policy.

Whether its raising the Federal Funds rate, called Fiscal Policy, or manipulating the money supply by buying or selling bonds, called Monetary Policy, the Fed can have a huge impact on Trump’s fortune.

So, this week, when President Donald Trump said he thought the Federal Reserve is “making a mistake” and that “the Fed has gone crazy”, was he talking about what’s best for consumers (AKA voters) or what’s best for himself?

Higher inflation hits consumers immediately, especially those on fixed incomes and retirements. In the past year, we’ve already seen excessively-high gas prices, with current gas prices hovering around $4.00 per gallon.

Higher holiday prices would be hard on shoppers even as they’re hearing about a strong economy and record low unemployment.

At the end of the day, even if all other economic indicators are positive, it’s what’s in your wallet that matters most.

Just ask Donald Trump.

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