Are small rises in interest rates always bad? Should the stock market keep going up forever as long as Trump is president?
Amidst a torrent of news signaling a president in meltdown mode came reports that Donald Trump wants to fire Fed Chairman Jerome Powell for raising interest rates. This confirms the “president with fifth grade understanding” meme which has become so prevalent.
After the financial crisis (or depression) of 2008, the Federal Reserve kept interest rates artificially low for nearly a decade in order to stimulate economic growth. This was medicine for a badly ailing economy, but it came with side effects: Artificially low interest rates inflate the price of assets such as stocks. Speculators borrow money at super low rates and invest it in the stock market. As a result, the market soars to dizzying heights, from which it must inevitably fall because these heights are out of kilter with reality. By the end of a long bull market run fueled by low interest rates, stocks are simply not worth what people are paying for them. It’s like a game of musical chairs where no one wants to be the last one to sit down, or the last one left holding a basket of stocks bought at prices which far exceed the underlying worth of the companies whose shares they represent.
At Dow 25,000 and above, the stock market was a balloon inflated to the point that merely glancing at it might have burst the bubble. After a period of low interest rates, it’s the Fed’s job to gradually raise rates to reasonable levels to restore order to the marketplace. Stock market speculators may suffer. But do you know who was suffering during the extended period of low interest rates? Seniors who hoped to live off the meager interest from their savings. Now, as interest rates move toward historic norms, the stock market may come down, but there will be a better, more realistic balance between different asset classes — less “funny money” and a return to investing based on sound valuation.
Trump seems to have no clue about economic cycles. He thinks the stock market should just keep going up as long as he’s president (and the sun should always shine on days when he wants to play golf). Policy experts warned him not to take credit for a rising market, lest he own a market crash — but did he listen? No.
The views expressed are my own, and do not represent any other person or organization.
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