Will Trump Make Deposit Rates Great Again?
For savers who have lived with the ultra low interest rate environment for the last eight years, they may take some comfort that President-elect Donald Trump has said “Yellen is keeping rates too low, too long.” A Trump Presidency could speed up the pace of Fed rate hikes, and based on interest rate history, deposit rates do track Fed rate hikes and have often outpaced Fed rate increases.
The first way a Trump Presidency may speed up the pace of Fed rate hikes is by changing the Fed. The most obvious change would be to replace Fed Chair Janet Yellen who is considered to be dovish on the Fed hawk-dove scale. The earliest that Trump can replace Fed Chair Janet Yellen is February 2018 when her term ends. Trump could put pressure on Yellen to step down, but that doesn’t guarantee a change. Fed Vice Chair, Stanley Fischer, is also considered dovish. His term as Vice Chair is scheduled to end on June 2018.
The most important part of the Fed in terms of policy action is the seven-member board of governors. These are permanent voting members on the rate-setting FOMC. Most members of this group have long been considered dovish. Fed governors are nominated by the President and confirmed by the Senate. Currently, there are two vacancies. President-elect Trump will likely be able to fill these two vacancies in 2017 with hawks.
Even a new more hawkish Fed will find it difficult to raise rates if the economy isn’t growing. Higher rates will depend on a growing and strengthening economy. This Wall Street Journal article cites a survey of economists who forecast rising GDP, inflation and interest rates under a Trump Presidency. According to the article, this is due to “Republican’s proposals to reduce taxes and invest in infrastructure will amount to a substantial fiscal stimulus.” However, there are risks. Economists worry about the potential of a trade war.
Another thing that impacts not only the economy, but also banks’ decisions on deposit rates is financial regulation. According to this Wall Street Journal article:
President-elect Donald Trump vowed anew on Friday to dismantle the 2010 Dodd-Frank financial overhaul, at the same time his transition team is tempering expectations for a full repeal of the sweeping law.
It’s good to hear that a full repeal is unlikely. Don’t forget that the standard deposit insurance coverage increase to $250,000 was part of Dodd-Frank law. An important part of the regulation was to prevent a repeat of the 2008 financial crisis. Hopefully, changes will only improve the regulation in that regard. Of course, the Dodd-Frank Act was massive, and bank industry argued that it was costly even to community banks. If changes can be made to reduce the cost for banks and to make it easier for them to lend, that may help push deposit rates higher.
Changes In Our Deposit Account Strategy?
After the last eight years of this ultra low interest rate environment, changes that give hope to higher interest rates are refreshing. As DA reader Lou commented in the forum “we might finally see a normalization of interest rates.”
Changes may not come fast enough for savers. Even a more hawkish Fed will probably not be in a rush to increase rates. Also, many fiscal policy changes will need Congressional approval, and that will likely not be fast with a Senate that only has a slight Republican majority. And once new laws are enacted, their effect on the economy can take awhile. In summary, I think it’s too soon to make major deposit account strategy changes. Rates may still rise much slower than we would like to think. The same strategies that I suggested in January still make sense today.
In the primaries, Trump said he would replace Yellen, but he did not say it was because he wanted interest rates higher, he said he simply wanted his own person at the helm of the fed. He added that he always favors low interest rates.
In the general election, he continued to attack Yellen, but only then said the opposite, that interest rates needed to go up.
So, which Trump do you believe? People will tend to take notice only of the Trump they want -- it is very difficult to keep track of everything someone says, and their history about following through with what they say. And someone taking an overview of Trump's approach and style will see he absolutely counts on that. He's a showman and used the smoke-and-mirrors approach. Its a strategy.
Reasonable people continue to try to take clues from what Trump says, but what Trump says is even less reliable that what you might hear from P.T. Barnum. Frankly, I seriously suspect that Trump has studied P.T. Barnum, and taken it to new heights.
So, if you try to draw conclusions from what Trump says, you will need to take a much broader look and far more than simply what he says.
Meanwhile, even the Fed is indicating it is now pretty much at its employment goals and ready to push rates up toward whatever it considers to be normal -- this before Trump won the election. So, rates going up in the next year will be misinterpreted as being done because Trump is pushing them. In reality, Trump's influence on the Fed this coming year might be only his dramatic plan to cut taxes, flooding the economy with money just when the Fed believes the economy is starting to take off, and even as inflation already was showing signs of starting to rise.
What the Fed will have to realize now is that it is in a dangerously low rate environment that will leave it unable to address the inevitable inflation from the huge tax cut. It will have to recognize it has rates in a very dangerously and irresponsibly and pointlessly low environment, and has a good way to go just to get to a place where it could possibly try to spring off to fight inflation. In the face of that, the only responsible action would be to raise rates faster than they otherwise would rise.
So, rates might go up regularly in the coming year, something that would have happened regardless of Trump but faster in order to counter him, not to appease him. If they do not, the Fed is not going to be able to stop inflation from Trump's huge tax cut without crashing the economy, a crash that might be inevitable in the long run regardless.
That action on rates this year will not be to appease Trump, but to try to counter him.
Bottom line, maybe tough for many Americans, but for me the Obama years have not been all that bad. I'm concerned about Trumponomics because I've seen the movie before and it does not end well.
Sad that so many people couldn't tolerate the idea of a black man in the WH and brought their racist tendencies back to the surface. Sad that we now have a misogynistic, xenophobic, narcissistic sociopath about to embrace the swamp.
It's Hillary I couldn't tolerate, that's why I voted for Trump.
I suspect the President-elect will face governance issues. In order to fulfill two of his major economic "promises" (more jobs and lower taxes), and his reluctance to reform entitlement spending, he will butt up against deficit hawks in the House who wield much more power on these matters than he seems to acknowledge. Then, of course, there's the minor matter of getting the Senate to approve the House bills without major concessions. A President Trump cannot sign a bill which does not reach his desk.
Moving right along, even if Congress can agree on a jobs bill, and a tax bill, the question is presented whether either would benefit Trump's base. For example, it's one thing to pass a huge infrastructure/jobs bill. It's quite another to match the jobs thus created with the skill sets and locale of the un- or under-employed. Similarly, tax cuts are great. Tax cuts funded by increased borrowing (with attendant debt and the prospect of inflation) are great for the net creditors out there, with paid-off mortgages, not so hot for the lower-to-middle class family with credit-card debt and a hefty adjustable-rate mortgage. Or renters, for that matter.
Stated another way, it's complicated.
Trump has a well established history of throwing his debtholders under the bus. It is not safe to assume he won't use the same tactics on a larger scale, especially since he said it.
I doubt seriously a Steve Mnuchin-led Treasury would roil the financial markets by messing with debt obligations. Any major overhauls of FDIC or NCUA protection (or the limits of protection under Dodd-Frank, see Ken's comment in the main article) would need to come from Congress. I think a good adage is that Trump supporters took him seriously, but not literally. Clinton supporters took him literally, but not seriously.
Both Mnuchin and Bannon know (or should know) that even a hint of "re-structuring" of federal debt would be read by holders of that debt as a hint of default. Interest rates on Teasuries would sky-rocket, and the interest-rate burden of outstanding debt (not to mention future borrowings required for any ambitious infrastructure/jobs bill) would become untenable without tax increases.
Both Mnuchin and Bannon know (or should know) that any proposed reduction in FDIC/NCUA protection (either as to scope or limits) will result in a major backlash from both issuers and holders of existing CDs, not to mention AARP. I just don't see any pro-reduction constituency.
After so many years of low interest rates, I have trouble wrapping my head around the notion of a rapid return to "normal". I do vaguely recall something like this happening MANY years ago, but I was just beginning to have awareness of economics and markets back then and my recollections are frankly too vague to be useful.
But stuff is popping, there is no question of that. Trump is acting very deferential and restrained because he's WELL aware Obama is still POTUS, and also because he is still in process of getting his ducks lined up. But commencing January twentieth, only about two months from now, there is high likelihood Trump will explode with announcements of positive changes for the American economy. After all, it's what he promised during the campaign. Trump is a very smart and cagey guy. He didn't become a billionaire by being a dummy. The guy is dead-on serious and even now, still with two months to go, real change is saturating the wind. It's rather exciting, but also scary at the same time, because you just do not know exactly what is coming.
People are not so dumb and brainwashed like she think we are.
What ever condition Hillary is in, ill or not, she did to herself with her ego driven self enrichment plan that failed. Thank God! Does anyone think she was putting what was best for our country first, ahead of her own personal thirst for power and wealth? No need to feel sorry or compassion for her. It was all her own choice.
Save your compassion for all our dedicated service men and women who honorably served/are server our country.
With Clinton, Yellen will have another 4 or more years.
With Trump, Yellen will be gone in a year.
As long as Yellen is Fed Chief, you will get sub-1% interest (0.25% rise a year if lucky). Yellen don't care about savers. She worries about keeping the stock market sky high and Wall Street.
No need to keep feeding people who want something for nothing. (pay little to no interest rates on loans). Way past to cut the handouts!
What you "should" be worried about is that nothing ever really changes. Kids who go to Harvard, Yale, Stanford, and such, are going to be influential in this country's future for as far as the eye can see. Even Trump, who went to an Ivy-league school and then to Wharton. The real "swamp" to be drained starts with Yale's "bones" men, Harvard's lock on Goldman Sachs, and Stanford's links to Silicon Valley.
We, as a country, have much more to worry about than what is taught. We have to worry about the elites we create, and what they do.
It is the younger generations that will have to live with what they have created for themselves and their children's futures. A world full of greed and corruption, lacking any resemblance of ethical and moral standards. It is spreading like a cancer on what was a civilized society. "Me first, I want it all NOW"
I find it illustrative that both Ben Carson and Newt Gingrich declined positions in the new administration after (and only after) the new Trump policy on no lobbying for five years after service was announced. Hmm, see a connection?
This is a valid point. I guess the new Administration will first have to define "lobbying" so as not to run afoul of the First Amendment. Assuming that can be done, I'm making a great leap of faith to assume that Congress will either enact the ban into law, or the new Administration will do it by simple contract law (similar to an employment agreement), and it will then be up to the Courts to enforce. By the way, I personally think it's a great idea.
Hence, Trump is safe from impeachment. Maybe, instead, they will impeach only Trump's hair! Heck, such hair is self-evidently impeachable!! OTOH, that hair does seem to work for Melania . . . who is not exactly the worst looking woman I ever saw. So I dunno.
Now there's something to keep you up at night!