How Much Do The Markets Believe The Fed? | ETF Trends

For most traders and investors, the FOMC, or Fed announcement is an event that triggers excitement and apprehension, as traders scramble to interpret Fed statements, often jolting the market as the news is released.

But now there is evidence that with President Trump’s persistent tweeting, bashing the Fed and its Chairman Jerome Powell, investors could be putting less stock in the announcements, going so far as to even view the Fed, an autonomous entity, as having little independent power from the executive branch.

Back on April 18, the president bashed the Fed’s approach to monetary policy, which he believed was driving up the dollar and making the U.S. less competitive globally, where zero interest rates prevail. He has called Chairman Jerome Powell “clueless” and Fed officials collectively “boneheads.”

Last week the U.S. central bank cut the overnight rate by 25 basis points to a range of 1.75% to 2%. This is the second time this year the Fed has lowered rates, following a 25 basis point cut in July, which tanked the market, and was accompanied by an explosion in volatility and investor distress.

No Further Cuts This Year?

However, the Fed’s rate outlook for the remainder of the year indicated no further cuts. The Fed was also divided in its decision to lower rates, with three officials dissenting, the most dissents for a Fed decision since December 2014.

Much like his effect on markets when tweeting about the trade war, experts believe that the president could be affecting the market’s perception of the Federal Reserve as well.

“Overall, we find strong evidence that the consistent pressure applied by President Trump to pursue more expansionary monetary policy is manifested in the market expectations of a lower target rate, forecasting a steady erosion in central bank independence over the course of his presidency,” said the paper, authored by economists Francesco Bianchi of Duke University and Howard Kung and Thilo Kind at the London Business School.

“Our findings that market participants do not perceive the Federal Reserve as independent from the executive branch has indirect, but important, consequences for the actual autonomy of the central bank,” they added.

Related: Stocks Get A Boost From Fed Comments Once Again 

Quantifying the impact, the economists said the approximately 30 tweets have sliced about 30 basis points per tweet off the fed funds futures contract, or 10 basis points overall. This is quite a measurable impact, considering the Fed typically moves its rate 25 basis points at a time.

Nevertheless, while it is unclear where the market will move based on presidential tweets about the Fed, investors looking to take advantage of further strength in U.S. equities if the domestic markets respond positively to future rate cuts can look the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI), which offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.

Investors who believe the market is ready for a pullback or selloff can look into the Direxion Daily S&P 500 Bear 1X ETF (NYSEArca: SPDN).

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