Trump criticises 'clueless Jay Powell' as markets plunge

WASHINGTON DC- JULY 31 Federal Reserve Board Ch

Trump criticises 'clueless Jay Powell' as markets plunge

"Our problem is with the Fed", Trump tweeted, blaming "clueless Jay Powell and the Federal Reserve".

On August 14, the president criticised the Fed and its "clueless" chairman Jerome Powell for not reducing rates aggressively enough as investors flocked from U.S. equities into Treasury securities.

Analysts concur the Wall Street rout was caused by Trump's intractable trade war with China and the resulting volatility and uncertainty wracking markets worldwide. The Dow Jones Industrial Average plunged by around 2.8 percent. And assuming the Fed's current cycle of rate cuts is just a limited "mid-cycle adjustment", as Powell declared last month to Trump's annoyance, the ten-year yield should price in the idea that rates will go back up at some point when the economy returns to strength.

The yield on the benchmark 10-year Treasury note stood at 1.623% early Wednesday, well below the 2-year yield at 1.634%.

"Our problem is with the Fed", Trump tweeted.

On Wednesday, White House trade adviser Peter Navarro said the Federal Reserve should call an emergency meeting and aggressively cut interest rates.

In the U.S., the Federal Reserve recently made its first interest rate reduction in more than a decade, and is likely to come under more pressure from Trump to drive growth in the United States economy by pursuing further cuts in the near future.

So when the Fed has clearly telegraphed that it is about to cut short-term interest rates, it makes ideal sense that long-term bond yields would fall in anticipation of those cuts.

These results contributed to London's FTSE 100 closing more than one per cent lower on Wednesday, while markets in Germany and France finished the day more than two per cent down.

China, which has been gradually reducing its holdings of US Treasury debt, for the first time since May 2017 is no longer the biggest US creditor, according to data released Thursday.

Along with the rate cut at the last Fed meeting in July, it would also mean the US central bank will have used up nearly half the rate-cut "ammunition" assembled during a slow-moving, and ultimately truncated series of rate increases begun in 2015.

The news was quickly drowned out by an escalation of the trade war with China. Or if the Fed appears to be in denial about the need to cut rates sharply but is expected to figure it out sooner or later, that's another reason long-term yields would fall. There has also been a reduction over time in the typical size of the term premium, meaning the economic outlook doesn't have to move as far from neutral as it used to for the yield curve to invert. The yield curve has inverted prior to each of the past seven recessions.

Whether that proves adequate is another matter. Clearly, the economy is not on the rise as President Donald Trump has stated.

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