During the election campaign, Donald Trump accused the Fed of playing the Democrats’ game by keeping rates low and creating a “horrible financial bubble”. Trump had estimated the Fed was keeping its base rates “artificially low” in order to allow President Barack Obama to leave office without having to face the consequences of a rate hike, adding that the Fed’s Chairwoman, Janet Yellen, should be “ashamed of herself”.

When the Fed lowered its base rate in reaction to the 2008 crisis – and kept it low the following years – most economists and political leaders thought this was very good, that this was the thing to do. Very few were criticising this policy then. But now, almost everyone realises this was a trap from which it will be very hard to escape.

States are over-indebted but low rates, or even negative rates in certain cases, make this debt relatively painless, since servicing the debt costs about the same, or even less. This is great! Let’s borrow some more! But if rates were to go up suddenly, budgets would turn to deep red and start choking. Banks, insurers and pension funds own large quantities of sovereign bonds on their balance sheets, and their value will plummet if rates go up quickly. There will be gigantic losses that will put the whole financial system in jeopardy. And that’s without taking into account the derivatives, a large portion of which are indexed on interest rates.

Donald Trump has been right to throw a brick in the puddle during the campaign by denouncing the deleterious effects of low interest rates. He helped put in the spotlight growing criticism about this situation. But now, what is he going to do with his victory in this regard? If Janet Yellen raises rates too abruptly in December, she will provoke a financial crisis that would surely cripple the new administration’s first steps, as Trump officially takes office on January 20, 2017. This could be quite a hindrance. If “dark forces” were intent on destroying Trump, this is how they would do it.

Thus it is essential for the new administration, with the blessing of the Fed, to raise rates very gradually, in order to see what “gives” here and there and to “plug the dam”. But could the financial sector, on the zero-rate drug for so long, endure a return to the norm? Well, I don’t think so. And such a policy would entail reducing the federal government’s debt dependency – reducing the deficit – because otherwise there will be no way to sustain the budget; but the president-elect hasn’t made this his priority. Trump will increase U.S. debt exponentially, according to Egon von Greyerz, and, surely, reversing the trend in the growth of debt would seem like a miracle.

My prediction: Donald Trump and Janet Yellen will make peace and continue with this low rates policy – raising them very slowly – to save face. Why would one create a crisis worse than the one in 2008 just to raise rates? Voters don’t care for interest rates as much as they do for unemployment or industrial jobs.

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