Is A Trump - Yellen Showdown Ahead?

No surprises at Wednesday's Federal Reserve meeting. The U.S. central bank team headed by Chair Janet Yellen pulled the trigger on the first interest rate increase in 12 months, nudging the Fed's benchmark rate to a still ultra-accommodating 0.50-0.75%.

In the minutes after the widely expected interest rate hikes:

  • Gold prices ticked slightly lower.
  • The U.S. dollar jumped higher.
  • Treasury yields gained.
  • Financial stocks turned broadly higher.

While this week's interest rate move was widely expected, a bigger question heading into 2017 is what will President-elect Trump think of the rising interest rate environment? The Fed now projects a total of three interest rate hikes in 2017, up from a previous two.

Higher Borrowing Costs for Consumers

This could begin to trigger a rise in borrowing costs throughout the economy impacting individual consumers with slightly higher rates on mortgages, car loans and credit card rates.

No doubt some traders will be monitoring President-elect Trump's Twitter feed, which has become a market mover as of late.

A Trump tweet earlier this week which called Lockheed Martin's F-35 Joint Strike fighter costs "out of control" triggered a quick sell-off in Lockheed Martin's stock, initially wiping out $4 billion of the company's market value.

President-elect Trump did suggest that Janet Yellen was keeping rates low during the campaign to support the outgoing administration. He also suggested that low rates were creating a "false economy."

Historically, United States presidents have avoided interest rate talk in deference to the Federal Reserve's independence. The incoming President, however, has already shown a willingness to break tradition on other matters during his transition.

At the heart of the matter is that President-elect Trump's proposals to boost economic growth through lower taxes, deregulation and billions of dollars of infrastructure spending will also likely boost inflation.

One of the main jobs tasked to Janet Yellen and the Fed is to keep inflation under control and their main method for doing so would be a shift to a more aggressive interest rate hiking cycle.

Are Stocks Near A Climax?

The stock market is shouting out a great big hurrah right now. Stocks are cheering as the Dow Jones Industrial Average approaches the 20,000 mark for the first time in history. However, analysts are also warning that the market is extremely overvalued, which leaves it vulnerable to a turn.

As the calendar prepares to flip to 2017 in just a few weeks, not only are stock prices in the nose-bleed section, but a developing brew of inflation and higher interest rates could be the trigger the brings the stock market bear back out of hibernation.

Is your portfolio properly hedged? Gold and other tangible precious metals assets have the proven ability to diversify and protect a portfolio against stock market declines. We, at Blanchard and Company, believe that gold and silver bullion in physical form is an appropriate asset for a small portion of any properly diversified investment portfolio. Call us today at 1-866-827-4314 for a confidential consultation with one of our portfolio managers.

Read more: Avoid These 4 Mistakes When Buying Coins As An Investment