Business Corpus: Why Trump Attack On Fed Is Bad News For StocksThe Fed is unlikely to pause rate hikes due to President Trump's taunts. Yet Trump tariffs may keep escalating as long as the president can blame Wall Street woes on rate hikes. The post Why Trump Attack On Fed Is Bad News For Stocks appeared first on Investor's Business Daily.

[Collection]

President Donald Trump's charge that the 'loco' Fed is to blame for the stock market sell-off is bad news for Wall Street. Blaming Fed rate hikes absolves Trump tariffs and the China trade war of any responsibility for the stock market swoon.

Here's the problem: The Fed is highly unlikely to respond to Trump taunts. Even after the stock market took a dive over the past week, financial markets were pricing in 80% odds of another Fed rate hike in December. Yet as long as the president has a fall guy and won't come to terms with the disruptive potential of Trump tariffs, he's unlikely to stop escalating his China trade war.

Trump Has A Point On Fed Rate Hikes

There's a good case to be made that Trump is right and the Fed is wrong about the risk of excessive monetary tightening, but policymakers are sincere in their belief that their path of gradual Fed rate hikes is the right path to extend the economic expansion. In fact, Fed Chair Jerome Powell laid out in fairly clear terms two weeks ago how big of a stock-market correction would be needed to get the Fed to shift gears.

For the Fed to react to financial market weakness, there would have to be a "significant correction and lasting correction," Powell said at the Sept. 26 press conference following the Fed's most recent rate hike.

So a sell-off similar to the one that followed the interim stock market peak at the end of January likely wouldn't grab the Fed's attention. That correction saw a 13% drop in the S&P 500, but stocks soon rebounded from lows and rallied to all-time highs within eight months.

The Fed wouldn't want to take a break due to a correction, then get caught flat-footed as animal spirits revived. Bottom line: Before prompting the Fed to pause, the correction would likely have to hit a bear market decline of 20%. That would mean an S&P 500 level of about 2350, down from the 2941 record high on Sept. 21 and still about 14% below Thursday's close on the stock market today.

Trump Tariffs' Economic Impact

Powell's "significant and lasting"correction construction seems to imply that December is too soon for a change in the Fed's course. Yet evidence of a bigger-than-expected economic cost from Trump tariffs might still prompt the Fed to reconsider. To be sure, most economists expect minimal impact from the latest wave of 10% Trump tariffs on $200 billion in Chinese imports. UBS is an exception, projecting just 1.2% annualized GDP growth in Q4 as smaller manufacturers struggle with supply-chain disruption.

Those Trump tariffs went into effect on Sept. 24 and are due to automatically escalate to 25% on Jan. 1 if there's no thaw in the China trade war before then. So what would it take for Trump to de-escalate that conflict?

UBS has explained that Section 301 rules used by the Trump administration to justify the tariffs make a near-term deal very unlikely. Either the Trump administration will escalate the Trump tariffs as planned, or else certify that the intellectual property harm used to justify the Section 301 tariffs has been remediated.

The deep divisions with China over its state-driven economy, market restrictions and Made in 2025 technological ambitions would seem to preclude Trump giving China a clean slate. Meanwhile, Beijing has made clear that standing up to Trump is a matter of national honor, even if it is coming at a significant economic cost.

The White House is reportedly planning for a Trump meeting with Chinese President Xi Jinping at the Group of 20 meeting in late November. That creates some hope for a near-term deal to avert a divorce in the world's most important economic relationship. But earnings season and a resurgence of corporate stock buybacks are a much better reason for Wall Street portfolio managers to buy this dip. However, any rally may prove fleeting as long as Trump tariffs and Fed rate hikes continue to escalate.

YOU MIGHT ALSO LIKE:

How IBD's Rules Protected FANG Investors As Stocks Swooned

The Big Picture: Bears Rip Stocks As Market Shifts To Correction

Here's A Key Reason Why Stock Market Buyers Left — But Will Be Back Soon

Fed Rate Hikes, Trump Tariffs And Stocks: Something's Got To Give

Investor's Corner: How To Spot Major Stock Market Tops

The post Why Trump Attack On Fed Is Bad News For Stocks appeared first on Investor's Business Daily.