By Clint Siegner

U.S. equities got a free ride on the Trump train after his election, even as Federal Reserve officials hiked interest rates. That ride may have ended last week.

If commentators are correct and the blame for recent selling in the stock market falls on the burgeoning fear of rising interest rates, it looks like Fed tightening is finally having the effect many predicted when the cycle began.

Most currently expect the FOMC to continue with hikes at about the same pace set in 2017. They have gotten away with several hikes, but attempting several more will be harder for them.

The question is whether the Fed’s tolerance for pain is any higher under new chairman Jerome Powell. We’d wager that it won’t take much in the way of flagging stock prices and slowing growth to have them reversing course and punching the stimulus button.

No one should bet that last week’s rally in the dollar means the bottom is in. The next few years look downright terrifying for the greenback. Here are some factors to consider:

• Congressional Republicans embarrassed themselves last week by proving the lip service they pay toward fiscal conservatism is nothing but lies. The Republican leadership shepherded through $300 billion in additional spending. Furthermore, they once again completely suspended the limit on borrowing;


• The Treasury will be issuing staggering amounts of new debt to fund the Congressional spending spree. Last fall’s tax cut may be good news for taxpayers, but it will also magnify federal deficits. Net new debt in 2018 is expected to be $1.3 trillion – the highest since 2010!


• President Trump will soon begin the push for a trillion-dollar infrastructure program. That will almost certainly be paid for with additional borrowing.


• The creditworthiness of the U.S. is once again back in the news. Rating agency Moody’s raised the idea of a downgrade for U.S. debt last week.

There is a tsunami of new Treasury debt coming to market in the coming years. Absent Fed intervention with a new bond purchase program and/or renewed stimulus, market forces are going to drive much higher yields. A whole lot of bond investors are going to need serious inducement to buy up all of the trillions in new debt that’s coming – probably more than either the markets or the federal budget can bear.

That’s why people should look for the Fed to soon start putting downward pressure on rates, not upward. And don’t let anyone tell you last week’s rally in the dollar has any kind of future. You can expect several trillion more dollars to roll off the printing presses over the next few years.