Chief economist update: It wasn't me, it's the Fed

"The Fed is going wild. The problem in my opinion is Treasury and the Fed. The Fed is going loco and there's no reason for them to do it. I'm not happy about it."

This was US president Donald Trump's take on the previous day's slump on Wall Street that shook equity markets around the world.

Trump continued his attack on the Fed as the slide on Wall Street continued overnight. "It's a correction that I think is caused by the Fed and interest rates. The dollar is very strong, very powerful, and it causes difficulty doing business." The Fed "is far too stringent ... they're making a mistake and it's not right."

Well, Trump's correct if you look at the litany of reasons behind the past two-day's sell-off - Fed tightening, bond yield rise, trade war (but of course, he's not going to blame himself), slowing China and global growth, overvaluation, slowing momentum, bearish technical indications, and whatever else you can think of.

Trump has already made his displeasure with the Fed's actions way back a few months. It was easy to dismiss his ranting then. But Trump's recent outburst has been straight away vindicated by the US inflation report released last night.

America's annual headline inflation rate slowed to 2.3% in September from 2.7% in the previous month. This is lower than consensus expectations for a 2.4% gain and is the slowest increase in consumer prices since February this year (2.2%). Core inflation remained unchanged at 2.2% in September from August and also less than expectations for a pick-up to 2.3%.

Despite the strength of the US economy - underscored by an unemployment rate (3.7%) that's down to a 49-year low - inflation hasn't significantly accelerated (and given the latest CPI report, even easing).

It's not looking to take-off anytime soon either because of tamed inflation expectations. Higher inflation expectations beget higher actual inflation.

US inflation expectations - as measured by the yield differential between nominal US bonds and TIPs - haven't risen sharply. The differential on the 5-year's currently at 2.1% from 1.9% at the start of 2018 and 2.2% from 2.0% on the tenners - more or less within the Fed's 2.0% inflation target.

Trump might still get what he wants from the Fed for unless inflation and inflation expectations rise sharply (or reverse September's slowing picture), expectations that the Fed will raise interest rates by another 25 basis points at its December FOMC meeting would weaken.

However, because markets have already priced in a December rate hike, the Fed could still proceed. Not doing so could raise suspicion that there's something inauspicious developing in the US economy.

In addition, Trump's continued attacks on the Fed would make it more likely for Powell to follow through to underscore the Fed's independence from Trump.

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