Donald Trump’s war on the Federal Reserve
Pity Jay Powell. The man who appointed him as chair of the US Federal Reserve wonders whether he is a bigger enemy of the US than China’s president, Xi Jinping. Though Donald Trump deleted that particular tweet, no one will forget that a US president implied his country’s central bank was run by a traitor. Previously, Mr Trump had described Mr Powell as “clueless” and a man with a “horrendous lack of vision” who is like a “golfer who cannot putt”. Also he “maybe” regrets having picked Mr Powell.
Anyone would think Mr Powell was trying to ruin Mr Trump’s re-election prospects. In fact, most of Mr Trump’s recent epithets came after the Fed had done what he wanted by cutting interest rates in late July. His deleted tweet followed an otherwise anodyne speech in which Mr Powell sounded a mildly dovish tone about the Fed’s likely trajectory. His offence, it appears, was to sound agnostic about how far a central bank should go to counteract the fallout from a trade war that is harming domestic growth. Though the Fed chair was too diplomatic to single out America’s escalating trade war with China, Mr Trump correctly sensed that this was the unforced error to which the Fed chair was referring.
Where does it go from here? At the best of times, US presidents have limited power to stop a recession, or even a growth slowdown. Mr Trump has already ruled out two out of the three most obvious things he can do to to keep the economy buoyant ahead of next year’s election. The first would be to call off his trade war with China. The likelihood that it will get worse has spurred a flight to the dollar, which has more than wiped out any depreciatory effect of last month’s interest-rate cut of 25 basis points.
The US investment outlook is already fraught with uncertainty. On Friday the US president “ordered” US businesses to disinvest from China. Concerns about a US-China decoupling now seem almost quaint. Mr Trump seems to be aiming for a full-blown divorce. This is not a climate that is conducive to higher investment.
The second tool Mr Trump is abjuring is global co-ordination. This weekend he is meeting his G7 counterparts in France. It would be the ideal moment for leaders to issue a clear statement that they will act to stop competitive currency devaluations and trade wars. Such pledges have had a constructive impact on many occasions over the past 50 years.
International co-ordination can steer currency markets, as happened in the 1980s, and can help to rescue the global economy, as happened in the financial crisis. But cross-border co-ordination is foreign to Mr Trump. It goes against his belief that sovereign powers should act alone. That is also out of the question.
The third tool a US president can use is fiscal stimulus. Mr Trump has mused in recent days about passing a payroll tax holiday, which would put more money in American consumer pockets.
However, Democrats would probably demand a price that Mr Trump would find hard to swallow, such as a federal $15-an-hour minimum wage, or a big infrastructure package. Each would boost the economy. But Mr Trump is allergic to striking deals with Democrats (and vice versa). Either way, Mr Trump now says a tax cut is off the table.
That leaves him with just one tool — bullying Mr Powell. The problem is that the Fed has fewer tricks up its sleeve than Mr Trump supposes. The difference between a fed funds rate of up to 2.25 per cent, which is where it is now, and going to 2 per cent or below would be minimal at a time when we are facing fears of what former Treasury secretary Lawrence Summers calls “secular stagnation” — negligible long-term growth. It is like pushing on a piece of string, as the saying goes.
A better metaphor would be that Mr Trump is administering futile beatings to the Fed chair with a golf club. The president can threaten all he likes — and even stretch the law to imply he can fire Mr Powell. That may be what eventually happens. But he cannot turn the Fed into a magic box of economic remedies.
The larger danger is that the Fed is already enabling Mr Trump to indulge his most combative instincts. Every time Mr Trump threatens China, he looks to the Fed to bail him out.
Mr Trump is now pushing for a 100 basis point rate cut. This puts Mr Powell in an unwinnable position. On the one hand, monetary easing gives Mr Trump further room to pursue his growth-dampening trade war. On the other, the Fed would be negligent if it failed to react to the incoming data. Mr Powell’s remit is to aim for the dual target of 2 per cent inflation and full employment. It is not his role to question a president who is making that task far harder.
Over the long term, the Fed as an institution will probably survive Mr Trump’s assaults with its independence intact. The same looks decreasingly likely for the man who heads it. It is entirely plausible that Mr Powell will be replaced from among the galaxy of unprincipled job seekers who audition daily on Mr Trump’s TV screen. Technically, the president does not have the power to remove the Fed chair before his term ends in 2022. But this president is a unique kind of leader.
Last week, Mr Trump tweeted quotes from an admirer that likened him to “the King of Israel”. Mr Powell should beware. Biblical scholars will recall that the infamous King Herod was fond of having heads served to him on a platter.