By Ilene
Is the Fed holding interest rates at rock-bottom levels to help Obama? Of course it is! Would Obama prefer to play golf than deal with a plummetting stock market? Of course he would! And the Fed's desire to help Obama is part of my thesis that the market won't meltdown this year or next year.
For a variety of reasons, including helping Obama, the Fed won't raise interest rates substantially in the near future, and maybe won't raise substantially at all. It really can't allow interest rates to climb more than slightly. Higher interest rates will translate into increased spending by the federal government on US debt. The increased spending on debt will lead to more debt, and more spending on debt, and so on.
Likewise, the Fed really doesn't want to see inflation rise too much, inspite of stating that it is looking for a 2%/year level. Higher — officially acknowledged — inflation means an increase in the cost of living index, which means the government has to make a cost of living adjustment (COLA) to for contracted employees, pension beneficiaries and entitlement programs including Social Security. (These programs are tied to a cost-of-living index, typically to the consumer price index.) Higher interest rates, higher inflation and thus increased government spending and higher government debt would be terrible for the Obama administration. In the short run, it will not be good for the economy either. Why would Obama allow that to happen in so far as he has any meaningful control?
So Trump is stating the obvious, as Jonathan Allen reports, in Trump accuses Fed of keeping rates low to help Obama.
Asked whether the Fed should raise rates, Trump said it should but would not for "political reasons."
"They are not raising them because Obama has asked them not to raise them," the billionaire real-estate developer said, echoing similar comments he made in interviews last month. "He wants to get out of office, because we're in a bubble, and when those rates are raised, a lot of bad things are going to happen."
He added, "Janet Yellen is highly political and she's not raising rates for a very specific reason: because Obama told her not to because he wants to be out playing golf in a year from now and he wants to be doing other things and he doesn't want to see a big bubble burst during his administration." Obama is due to leave office in January 2017.
White House spokesman Josh Earnest dismissed Trump's comments when asked about them at a news conference later on Tuesday. He said the administration "goes to great lengths" to ensure that the Fed can make monetary policies that are in the best interests of the country and the economy.
None of this is to say that the Fed doesn't think holding rates down is in the interest of at least part of the economy. Which part? If you own stocks, holding rates down is good (positive pressure on stock prices). If you rely on interest income, lower rates are bad — less interest income for you. If you live on social security, lower "inflation" readings are bad because they hold COLA artificially low and, as a result, your social security benefits become more and more inadequate, divorced from your real cost of living. We all know the real cost of living is rising dramatically, regardless of the government's flawed measures of inflation.
As Paul Price writes,
People [the non-politically motivated type] think of inflation as the one-year change in price of the exact same basket of goods and services they purchased previously. They don't use 'substitution' or 'hedonic' adjustments because those don't reflect the actual cost of what they are buying to maintain the exact same lifestyle. All that garbage, and the absurd 'owner equivalent rent' are simply government smokescreens to obscure the true rate of inflation. Our leaders have a vested interest in understating true CPI and PCE. It saves them a fortune in COLA adjustments and makes the deficit smaller while screwing the recipients (employees, pensioners, etc.). Rapidly increasing tax rates (sales taxes, property taxes, income taxes) and assorted fee increases at state and local levels are also making the true cost of living much more expensive. So are fast-rising health insurance premiums and co-pays. None of those items are reflected in the official CPI or PCE numbers.
See also: How The U.S. Government "Covers Up" 72% Inflation Before Your Very Eyes and Washington’s Biggest Lie (and Why it Continues to be Told).
Thus, low interest rates hurt retirees living on savings while low inflation keeps their social security payments low. For those with significant savings in the stock market, the fuel to the stock market offsets the loss of interest income and social security benefits to some extent. In that the stock market is an important, and very visible, piece of the economy, Obama, and by extension the Fed, does not want to see a collapse on his watch.
As Zero Hedge asks, "Is Yellen as political as Trump claims, and if so, will Obama risk a market drop just in time for a presidential election that makes his golf game far less pleasant a year from now?" (See clip at ZH, here.)
My answer is that Obama won't take that risk if it isn't forced upon him.
