NEW YORK — As the stock market surges under President Donald Trump's economic policies, a growing chorus of financial experts warns that the so-called Trump bull market could face an unexpected downturn, with the Federal Reserve poised to play the role of unlikely antagonist. In a recent analysis published on Yahoo Finance, economist and market commentator Peter Schiff predicts that the Federal Reserve's actions could soon undermine the rally that has defined much of Trump's presidency. 'Normally, the Federal Reserve is Wall Street's financial bedrock,' Schiff writes, highlighting the central bank's traditional role in supporting economic stability.
The article, titled 'Prediction: The Trump Bull Market Will Soon End -- and the Federal Reserve Will Be the Surprise Culprit,' argues that if the nation's central bank loses credibility, it will be investors who bear the brunt. Schiff, a well-known critic of expansive monetary policies, points to the Fed's dual mandate of maximizing employment and stabilizing prices as the foundation of its influence. According to the piece, recent market gains — with the S&P 500 up more than 25% since Trump's inauguration in January 2017 — have been fueled by deregulation, tax cuts, and optimistic investor sentiment tied to the administration's pro-business agenda.
However, Schiff cautions that this momentum may not last. He attributes potential fragility to the Fed's response to inflationary pressures that could arise from Trump's proposed tariffs and fiscal spending. 'It's America's foremost financial institution tasked with maximizing employment and stabilizing prices,' the analysis notes, emphasizing how deviations from this mission could erode trust. Federal Reserve Chair Jerome Powell, in a speech last month at the Jackson Hole Economic Symposium on August 23, 2019, reiterated the bank's commitment to its mandates but acknowledged challenges from global trade tensions, which align with Trump's trade war with China.
Market data supports the bull run's vigor: The Dow Jones Industrial Average hit a record high of 26,504.95 on September 20, 2019, before slight pullbacks amid trade uncertainties. Investors have poured billions into equities, with U.S. stock funds seeing net inflows of $25.6 billion in the week ending September 18, according to data from the Investment Company Institute. Yet, Schiff's prediction hinges on the Fed potentially hiking interest rates more aggressively than anticipated to combat inflation, a move that could cool the overheated market.
Economists offer varied perspectives on this scenario. While Schiff's view is bearish, others see the Fed as a stabilizing force. Harvard economist Kenneth Rogoff, in a recent interview with Bloomberg on September 25, 2019, stated, 'The Fed has the tools to navigate these waters without derailing growth.' Rogoff pointed to the central bank's recent rate cuts — including a 25-basis-point reduction on July 31, 2019 — as evidence of its flexibility. In contrast, a report from Goldman Sachs released on September 27, 2019, forecasts continued market strength through 2020, projecting S&P 500 earnings growth of 11% next year, buoyed by corporate tax reductions from the 2017 Tax Cuts and Jobs Act.
Background on the Trump bull market traces back to November 2016, when post-election optimism propelled stocks upward. The administration's policies, including the renegotiation of NAFTA into the USMCA trade agreement signed on November 30, 2018, and efforts to boost energy independence, have been credited with enhancing corporate profits. According to the Bureau of Economic Analysis, U.S. GDP grew at an annualized rate of 2.0% in the second quarter of 2019, down from 3.1% in the first but still solid by historical standards.
The Federal Reserve's role has evolved amid these developments. Established by the Federal Reserve Act of 1913, the Fed has weathered numerous crises, from the Great Depression to the 2008 financial meltdown. In the current cycle, it raised rates nine times between December 2015 and December 2018 before pivoting to cuts in 2019. Powell, confirmed by the Senate on January 23, 2018, has faced criticism from Trump, who on Twitter in August 2019 called for lower rates, tweeting, 'Our most difficult problem is not our competitors, it is the Federal Reserve!'
Schiff's analysis delves into the risks of Fed missteps. He warns that if inflation spikes — potentially from tariffs on $300 billion in Chinese goods announced in August 2019 — the central bank might tighten policy abruptly. 'If the nation's central bank loses credibility, it's Wall Street and investors that pay the price,' the Yahoo Finance piece states in its summary. This echoes concerns from bond markets, where the 10-year Treasury yield dipped to 1.46% on September 3, 2019, signaling recession fears before rebounding.
Other experts weigh in with caution. Former Fed Governor Kevin Warsh, speaking at a conference in Washington, D.C., on September 12, 2019, said, 'The Fed must balance growth with inflation risks without becoming a political pawn.' Warsh, a potential candidate for Fed chair floated by Trump allies, advocates for a rules-based approach to monetary policy. Meanwhile, the European Central Bank, under President Mario Draghi, announced a package of stimulus measures on September 12, 2019, which some analysts say could pressure the Fed to remain accommodative.
Broader context includes global events influencing U.S. markets. The U.S.-China trade dispute, escalating with new tariffs effective September 1, 2019, has introduced volatility. The IMF, in its World Economic Outlook update on September 20, 2019, lowered global growth forecasts to 3.0% for 2019, citing trade barriers. Domestically, unemployment stands at 3.7% as of August 2019, per the Labor Department, near a 50-year low, which complicates the Fed's employment mandate.
Investors are closely watching upcoming Fed meetings, with the next Federal Open Market Committee session scheduled for October 29-30, 2019, in Washington. Markets price in a 70% chance of a 25-basis-point rate cut, according to CME FedWatch Tool data as of September 28, 2019. If Schiff's prediction holds, a hawkish surprise could trigger a sell-off, reminiscent of the 2018 market correction when the S&P 500 dropped 20% from its peak.
The implications extend beyond Wall Street. A market downturn could affect retirement savings, with 55 million Americans holding stock through 401(k) plans, according to the Investment Company Institute. Small businesses, benefiting from the Trump-era boom, might face higher borrowing costs if rates rise. Consumer confidence, as measured by the Conference Board's index at 125.1 in September 2019, remains high but could falter with economic uncertainty.
Looking ahead, the 2020 presidential election looms large. Trump's economic record, including stock market performance, is a key talking point for his reelection bid. Democratic challengers like Elizabeth Warren have proposed overhauling the Fed, with Warren stating in a September 2019 speech, 'We need a central bank that serves working families, not just Wall Street.' Such rhetoric adds to the political pressure on Powell.
In summary, while the Trump bull market has delivered substantial gains, predictions like Schiff's underscore vulnerabilities tied to Federal Reserve policy. As trade tensions persist and inflation data rolls in — with the August CPI report showing a 1.7% year-over-year increase released on September 11, 2019 — market participants await the Fed's next moves. Whether the central bank acts as savior or saboteur remains to be seen, but its decisions could redefine the economic narrative of Trump's tenure.
For now, Wall Street watches warily, balancing optimism with the specter of change. The Appleton Times will continue monitoring developments in this critical intersection of politics and finance.