Speaking at an annual conference of top economists, bankers, corporate leaders and others in Jackson Hole, Wyoming, Federal Reserve Board Chairman labeled the President’s trade war as a source of concern for the economy, which led to the President lashing out against him on Twitter:
Jerome H. Powell, the Federal Reserve chair, kept future interest rate cuts squarely on the table on Friday but suggested that the central bank was limited in its ability to counteract President Trump’s trade policies, which are stoking uncertainty and posing risks to the economic outlook.
Mr. Powell’s remarks drew a swift and angry reaction from Mr. Trump, who equated the Fed leader with the president’s adversary in the trade war, President Xi Jinping of China.
“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?,” Mr. Trump wrote in one of a series of Twitter posts.
The president’s harsh response to Mr. Powell, a frequent target of Mr. Trump’s ire, came after the Fed chair emphasized the limits of the central bank’s ability to overcome economic uncertainty stemming from the president’s trade war.
“While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rule book for international trade,” said Mr. Powell, who spoke in Jackson, Wyo., at the Federal Reserve Bank of Kansas City’s annual symposium.
“Our challenge now is to do what monetary policy can do to sustain the expansion” to achieve the Fed’s goals of low unemployment and stable inflation, he had said earlier in the speech.
Mr. Powell’s remarks indicated that the Fed, which cut interest rates in July for the first time in a decade, remained willing to cut again in order to keep the economy growing.
But his reluctance to clarify the timing or size of any such move highlighted the central bank’s predicament: Unemployment is low and consumer spending is strong, but Mr. Trump’s trade conflict is fueling uncertainty, weighing on manufacturing and roiling markets. And the Fed is limited in its ability to resolve unpredictability.
“Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Mr. Powell said, adding that there were “no recent precedents to guide any policy response to the current situation.”
His comments followed Beijing’s announcement on Friday that China would retaliate against the Trump administration’s next round of tariffs by increasing taxes on $75 billion of American imports, including agricultural products, crude oil and cars. Both countries plan to increase their levies in September and December, which could exacerbate the economic harm from a trade war that is already causing financial pain across the globe.
Mr. Powell noted that the period since the Fed’s last meeting, on July 31, “have been eventful.” The day after that meeting, Mr. Trump announced that the United States would tax another $300 billion in Chinese products. Further evidence a global slowdown has also emerged since then, and financial markets have reacted to the “complex, turbulent picture,” Mr. Powell noted.
He said that policymakers were “carefully watching developments” as they assessed the implications for the economic outlook and monetary policy, and maintained an earlier pledge to “act as appropriate to sustain the expansion.”
Against that backdrop, some members of the policy-setting Federal Open Market Committee support cutting rates to shore up economic growth, while others want to wait to monitor how the trade dispute plays out.
“Risk management enters our decision making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy,” Mr. Powell said.
Here are the President’s tweets, about which I’ll have more to say below:
Powell’s statement doesn’t really provide any clear indication of where the Federal Reserve may be headed on the issue of future interest rate cuts, but in that respect, he is acting consistently with the manner in which his predecessors have in the past. As a general rule, the person serving as Federal Reserve Chairman has avoided direct commentary on Fed policy outside of the official communique that is released after each of the board’s meetings. The main reason for that is the desire to limit the impact that their words, rather than their actual policies, have on market activity and on the economy. Even when speaking officially, the men and women who have held the position have been known for speaking as opaquely as possible for the same reason that they don’t discuss the direction of policy in public.
Despite this, there’s no need to really guess what Powell was talking about here. Clearly, he is clearly making it known that the Federal Reserve has concluded, as have economists and economic analysts around the world that the trade war, and most especially the trade war currently going on between the United States and China, is having a negative impact on economic growth in China, around the world, and in the United States. Given that it is obvious to anyone who understands economics and how to read economic statistics that this is the case, it’s equally obvious that the Fed needs to keep an eye on the impact of the President’s ill-considered trade policies in setting interest rate policy. Indeed, it would be ignoring its statutory responsibilities if it failed to do so.
Notwithstanding all of that, President Trump is obviously not happy to hear the Federal Reserve Chairman that he appointed pointing out that his own policies are causing harm to the economy. As it is, there have been several reports this week quoting anonymous reports from inside the White House saying that that the President is becoming increasingly concerned that the state of the economy could have on his re-election chances next year. As a result, he has increasingly sought to “talk up” the economy in the apparent belief that he can talk the country out of a recession. He has also been lashing out at others as the source of any impending economic woes, with the Federal Reserve Board being the top candidate in that regard. Today, he capped that off with a Twitter post where he called the Chairman of the Federal Reserve Board an “enemy” because interest rates are not going down fast enough in Trump’s opinion.
The dangers in all of this are rather obvious. While the law does tend to shield the Federal Reserve Board in general and the Fed Chairman in particular from political influence, they are not entirely immune from those sources and, of course, they cannot respond to the President’s repeated attacks no matter how baseless they might be. Additionally, the law that governs the Fed is specifically designed to shield the Fed from political battles as much as possible. More likely than not Powell could not care less what Trump says about him on Twitter, but any time something like this happens it brings that entire balance into question. Let’s say the Fed does drop interest rates again at its next meeting, the President’s pressure means that people will likely ask if it is happening because it’s economically necessary or because the Fed is bowing to political pressure? The dangers of what is happening here cannot be overstated.
