My interpretation from this chart going back 56 years is that Donald Trump’s criticism of the Federal Reserve will kill the “Trump rally.”

It’s not a question of “if,” but “when” and from “how high.” At a minimum, the foundation of the death of the Trump rally will be laid this Wednesday. The Dow Jones Industrial Average DJIA, has jumped 8% from Nov. 8 through Dec. 9.

What is so special about this coming Wednesday? On that day, the Fed will announce its interest-rate decision. The consensus is that the central bank will raise interest rates by 25 basis points and issue a dovish policy statement, meaning policy makers aren’t ready to take aggressive action to stem inflation. After Brexit and the Trump election, investors hopefully have learned to take the consensus with a grain of salt.

Achilles’ heel

The Achilles’ heel of the Trump rally is interest rates. Based on Trumpenomics, the Fed should be raising rates not by a quarter of a point, but by half a point, and also issuing a policy statement that says rates will rise rapidly. A Fed that’s more hawkish than the consensus will kill the rally right away. On the other hand, if the Fed does not take this course, it will sow the seeds of inflation, which will end the rally down the road.

56-year chart tells the story

To understand how the Trump rally might end, let’s take a look at this 56-year chart.

Please click here to see the 56-year chart.

The chart compares GDP growth to inflation to the fed funds rate. Trump has repeatedly said that he can drive GDP growth to about 4%. The chart shows that every time GDP growth goes to about 4% from a lower level, the fed funds rate heads over 5%…Read more at MarketWatch


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