As Trump Attacks ‘Destructive’ Fed, Here's What the Charts Show
Various measures of borrowing costs show the Fed’s moves have been passing through to businesses and consumers.
(Bloomberg) -- The Federal Reserve has raised interest rates nine times during this expansion, with four hikes under current Chairman Jerome Powell. That’s drawn fire from President Donald Trump, who on Thursday tweeted that the central bank’s actions have been “unnecessary and destructive,” while his senior economic adviser has called for a cut.
Various measures of borrowing costs show the Fed’s moves have been passing through to businesses and consumers -- and activity in interest-sensitive sectors is either cooling or stable. Rate hikes haven’t brought growth to its knees, but they’re helping to gradually slow it from a robust 2018 pace of 3 percent.
“The question of whether they overdid it or not is still an open one,” said Gennadiy Goldberg, senior U.S. rates strategist at TD Securities LLC. “The administration seems to think that they did. Time will tell.”
Below, we chart eight gauges that lay out where Fed rate increases are showing up and how they’re impacting demand.
Financial Conditions
The Fed kept raising rates last year as the labor market roared ahead, inflation showed signs of picking up and stocks touched records. As officials projected further rate increases while global risks emerged -- including a trade spat and a Chinese slowdown -- markets swooned and overall financial conditions began to tighten sharply.
That change is one reason the Fed reconsidered its interest rate plans early this year: markets had done some of the work for the central bank, keeping growth from overheating and giving policy makers more latitude for patience. Conditions have eased again, though they remain tighter than early last year.
Consumer Credit
As the Fed’s policy rate -- the overnight lending rate for banks -- has increased, it’s passed through to consumer borrowing costs. Car loans, for instance, are now pricier than a year ago, and the rate for a 48-month new loan is the highest since 2011.
Against that backdrop, car sales appear to have plateaued.
Credit card rates have also moved up, which could weigh on consumer spending. Credit card balances continued to increase through the end of 2018, based on New York Fed data, but retail sales have recently come in soft and Deutsche Bank AG economist Torsten Slok has called higher borrowing costs an “important downside risk to the outlook.”
Housing Market
Finally, the granddaddy of interest-sensitive sectors -- housing -- saw mortgage rates march higher last year before easing their way into 2019. Rates remain elevated compared to where they had been earlier this cycle.
In housing, a slowdown is more evident. As home loans became more expensive, mortgage origination cooled and home sales stepped lower, both in previously-owned and new properties. That impact is felt beyond the real estate sector: home buying fuels knock-on economic activity, like furniture shopping.
Overall Economy
Rate increases probably haven’t entirely passed through to would-be borrowers yet. Officials typically assume that monetary policy acts on the economy with a lag of a year or more -- so there is probably more slowing in store.
Overall, hikes seem to have slowed activity without grinding it to a halt. That’s the point. The central bank’s goal is to cool the economy down to what policy makers see as a “sustainable” pace: an environment where people who want a job can get one, and where price gains are right around the Fed’s 2 percent target.
The job market has been booming, with unemployment near its lowest level since 1969. Inflation is close to the Fed’s goal, at 1.8 percent when excluding volatile food and energy costs. The fact that it’s still coming in a little bit shy is one reason that policy makers are now on hold.
Economic growth remains above the 1.9 percent level that the Fed sees as sustainable in the long run, but it’s slowing down. Economists surveyed by Bloomberg expect output gains to average around 2.4 percent this year before slowing to 1.9 percent in 2020.
Against that backdrop, whether rate increases were “unnecessary and destructive” is a point that central bankers might debate -- though it’s unlikely that they will. Officials avoid talking about politics and the White House. The idea is that staying outside of the partisan fray gives policy makers the flexibility and fortitude to slow down economic booms in hopes of preventing later busts.
“We try to make the decisions as best we can based on the data we have available to us and based on the goals that Congress has assigned to us,” Minneapolis Fed President Neel Kashkari said Wednesday. “We are all totally committed to our independence.”
To contact the reporter on this story: Jeanna Smialek in New York at jsmialek1@bloomberg.net
To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Scott Lanman, Jeff Kearns
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