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Fed Chairman Powell Meets Trump for a “Private Dinner”. How Does the Market Digest this Relationship?

Tim Frederick

A potentially explosive "private dinner" between President Donald Trump and Federal Reserve Chairman Jerome "Jay" Powell shook the markets earlier this month, which have consistently been rattled by their clashes over Fed policy. Coming so soon on the heels of rapid changes to those policies, there is growing concern in the marketplace about the Fed's independence.

The markets crashed to a 52-week low in December driven in part by Trump reportedly looking into the possibility of firing Powell (which he denied ever doing according to Treasury Secretary Steven Mnuchin) after the Fed raised interest rates for the fourth time in 2018. Such a move would be unprecedented, yet shouldn't be considered a surprise according to Meir Barak of Tradenet, the world’s largest day trading academy, who suspects further clashes to come.

“Relationships between the President and the Chairman have been a bit rocky from the start, even though the former placed the latter in his job. Trump does not quite believe in the “classical” model in which the executive branch is committed to the independence of the central bank. More friction between the two is expected,” Barak told Insider Monkey. Barak’s Tradenet Day Trading Academy offers a range of courses on technical analysis and a YouTubeTrading  Channel where he explains some aspects of technical analysis and conducts daily live streams of his trading.

Donald Trump

Trump had been a vocal critic of the Fed for months and blamed the market's Q4 swoon on its relentless rate hikes, though market observers believe his own relentless tariffs were equally responsible. Weakness in China that has developed partly due to the U.S/China tariff battle certainly weighed heavily on numerous stocks and industries in Q4, including Apple Inc. (NASDAQ:AAPL) and the energy sector. The iPhone-maker declined by 30% during the quarter, partly due to Q1 guidance that was downgraded primarily due to "economic deceleration" in Greater China. While Apple was facing problems in China even before the trade tensions escalated, those tensions have done nothing but exacerbate said problems.

The Energy Select Sector SPDR ETF (NYSEARCA:XLE) fared nearly as poorly, losing 25% of its value in Q4 as oil prices wilted under the threat of less demand from China. Among the sector's worst performers during Q4 were Marathon Oil Corporation (NYSE:MRO) and Schlumberger Limited (NYSE:SLB), shares of which dropped by 38% and 41% respectively. Rising interest rates also felled many cyclical, economy-driven businesses in Q4, including United Rentals, Inc. (NYSE:URI), which plunged by 37%.

The sputtering stock market was a major concern for Trump given its former reliability as a buoy against other criticisms of his rule, which is why Powell became a convenient and necessary whipping boy for its Q4 underperformance. In November, Trump told the Washington Post: "I'm not even a little bit happy with my selection of Jay. Not even a little bit. And I'm not blaming anybody, but I'm just telling you I think that the Fed is way off-base with what they're doing."

His continued rhetoric prompted a bipartisan pair of U.S senators to send a letter to the White House shortly afterwards, warning Trump to stop attacking the Fed and suggesting that resolutions or legislation could be tabled if he doesn't to protect the independence of the central bank.

Democrat Chris Coons later suggested during an interview in early-December that Trump was in the process of using the same tactics on Powell that he used to undermine and eventually fire former Attorney General Jeff Sessions, who had also been handpicked for the position by Trump. Coons believed the market would be very concerned about Trump removing Powell and would begin pricing those fears in, which appears to have been the case in December.

However, Powell and the Fed have also made notable shifts in their stances recently that some have attributed to the pressure being applied on them by Trump. Towards the end of November, Powell stated that rates were now just below the "neutral range" in terms of their likely impact on economic growth. That was a far cry from his comments of just one month earlier, when he declared they were still "a long way" from neutral. And while the Fed did hike rates again in December, it also made notable concessions by lowering its expected rate of increases in 2019 to two from three, and dropping the long-run level for its benchmark rate to 2.8% from 3.0%.

"We have seen developments that may signal some softening relative to what we were expecting a few months ago," Powell said during a press conference following the release of the Fed's statement. Powell added that political considerations played no role in the decisions.

Those concessions weren't enough to appease the markets (or Trump), as the SPDR Dow Jones Industrial Average ETF (NYSEARCA:DIA) sank during the final two hours of trading on December 19 following the Fed's announcement and Powell's comments. However, just a month later the Fed made another rapid turn in direction during its January meeting, announcing that it would be "patient" with further rate increases, raising the possibility that interest rates may not be raised at all this year.

The market is generally aligned with Trump in that it favors lower interest rates, which gave it two things to cheer about in late-January: rates remaining lower for longer and Trump being less likely to launch a holy war on the Fed. With the threat of Trump going after Powell's job seemingly in the rearview mirror and further interest rate hikes looking unlikely for the time being, the market has been able to let out a major sigh of relief. The SPDR S&P 500 ETF (NYSEARCA:SPY) has gained over 10% in 2019, while the Nasdaq has risen by over 12%.

The major indices have only made up about half of their Q4 losses thus far and economic indicators are painting a clearer picture of slowing global growth. Nonetheless, there is a lot more near-term market optimism now that fears about a Fed-induced recession through continued aggressive rate hikes have been alleviated, even if the ill-timed dinner that followed a few days later sent jitters through the market, with two days of losses following it. It surely won't be the last time that Trump and Powell shake the market with their heavily scrutinized actions.

Disclosure: None. This article is originally published at Insider Monkey.