August 7, 2017

During our last fiscal meltdown, the Federal Reserve took drastic measures. It lowered interest rates to basically zero, took on an enormous Quantitative Easing (QE) program, and increased its balance sheet from $900 billion to $4.5 trillion. The Fed thought the wealth effect of these measures would lift the economy. For some it did. But for the larger economy, the positive effects never took hold.

Instead, these folks saw their savings decimated, pensions slashed and more. The institutions set up to protect people were undermined, and so it’s no surprise that consumer confidence took time to restore. It’s also no surprise that regulatory reform to address these issues is almost a non-starter. Given the end of QE and the raise in rates, you’d think the market would react. It hasn’t. 


Richard Fisher, former president of the Dallas Federal Reserve Bank, thinks it’s due to President Trump. Fisher calls Trump the “Orange Swan.” The term is a play on “Black Swan,” which describes rare, surprising events with big ramifications. 

In this context, the Orange Swan is a pleasant surprise because President Trump’s policies have ushered in a pro-business government that has “trumped” what would normally be a market reversal. We’ve seen this before. The S&P 500 went up 8 percent after President Reagan’s inauguration. But it declined 20 percent overall in a year, primarily because it took time for his policies to take hold. In fact, it took until his second TERM to get tax reform in place.

Let’s also consider that every Republican president since Grant has experienced a recession in their first term. Plus, since World War II, 10 of the 13 times the Fed has tightened rates, it has led to recession. Big changes take time. The road could be bumpy, but let’s be patient.