Between Trump and the Fed, everything’s possible

Looking ahead to the upcoming Fed rate hike, the US dollar (USD) is expected to continue rising at least in the short term after the Dollar Index (DXY) already gained 8% over the last 3 months. While indicators of a healthy national economy accumulate in the United States, the likelihood that analysts expect a rate hike is now 100%.

Also, the economic and trade policies of the new President Donald Trump’s administration should accelerate inflation, further justifying a rate hike by the Fed with a possible theoretical goal of just over 2% for the prime rate by the end of Governor Janet Yellen’s term in February 2018.

In these circumstances, the macroeconomic timetable proves favorable to Yellen since she should break with the deliberate low rates policy that Trump harshly criticized during the presidential campaign.

As for Trump’s alleged willingness to replace Yellen before the end of her term and intervene in the Fed’s monetary policy, it hasn’t been confirmed by his transition team and would only get small support by a minority in Congress rather partisan of “the Fed’s independence within government.”

Therefore, Trump’s only sure option will be to appoint Yellen’s successor subject to confirmation by the Senate. However, in the event of a political deadlock because of a reluctant Fed, Trump could fire Yellen for gross misconduct, the most difficult would be to characterize the Fed chair’s fault by bringing evidence of the deadlock.

Considering Trump’s ability to act unexpectedly, Cyceon doesn’t therefore exclude such an option even though it’d be of last resort. Our opinion strengthened because of various press articles which conveyed warnings from Fed members that could even more encourage Trump to act.