Federal Reserve Report – The Real Fed Drama Lies Ahead: Trump and the U.S. Dollar

As expected the Federal Reserve left interest rates unchanged at the conclusion of its two-day meeting on Wednesday.  In a unanimous 10-0 vote, the central bankers voted to hold its benchmark interest rate steady in a range between 0.50% and 0.75%.

There were no surprises from the Fed this week, but the real story for investors could unfold in the months ahead surrounding the Trump administration and the level of the U.S. dollar.

Meeting Recap

The general tenor of the post-meeting statement was little changed as the central bank said “job gains remained solid and the unemployment rate stayed near its recent low.” In a new addition to the statement, the central bankers noted that American consumers have a more optimistic view about the economy going forward. “Measures of consumer and business sentiment have improved of late,” the Fed said, noting that household spending “has continued to rise moderately.”

Market Reaction

Gold spot prices edged slightly higher in electronic trading from their Wednesday settlement level after the Fed statement was released. April gold traded up to $1,208.89 an ounce after the statement was released.

Stock Volatility Is Picking Up

Stock market volatility picked up significantly in the past few days, as Wall Street traders were unnerved by some of the new executive orders from the Administration, which left the Fed meeting as a mostly ignored sideshow.

Battle over the Level of the U.S. Dollar

The Trump stock market honeymoon may be fading as traders brace for potential repercussions on a number of fronts, including trade. This week, the Trump administration accused Germany of currency manipulation, adding them to its list which includes China and Japan.

The Trump administration has been complaining about the high level of the dollar – which could leave the central bank as a potential target later this year.

Why? If the Fed hikes interest rates it will strengthen the dollar even further and the Trump administration has already said the dollar is too high.

A higher dollar tends to weigh on gold prices, while a weaker dollar tends to support gold prices.

Timing of Next Rate Hike?

Look at June for the next potential interest rate hike.  According to the CME Group Fedwatch tool, the market is pricing in a 17% chance of a rate hike at the March meeting, a 33% chance of a rate hike at the May meeting and a 48% chance of a rate hike at its June meeting.

The real market fireworks of 2017 could emerge if a political battle emerges between the Trump administration and the Federal Reserve. Rising interest rates could dampen economic growth – and that is exactly what President Trump is trying to spur. Interest rates remain near historical lows and there are new pressures building that could keep a lid on how high interest rates climb this year.

Blanchard and Company has been helping individual investors diversify their portfolios with tangible assets for over 40 years. Contact us at 1-800-880-4653.