Under pressure, Fed faces an outlook
clouded by trade wars and signs of weakness
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[June 11, 2019]
By Howard Schneider
WASHINGTON (Reuters) - U.S. President
Donald Trump's attacks on the Federal Reserve have broken one set of
precedents, his talk of stacking the central bank with political allies
has strained another, and his on-again off-again tariff threats have
made the economic outlook harder than ever to predict.
While the Fed may well find reason to cut interest rates in recent weak
job and inflation readings, doing so could also put a safety net under
Trump policies that, to the eyes of many policymakers, have to date done
more harm than good.
"There is a kind of feed the beast aspect to it," said former Fed vice
chair Alan Blinder. "Among the many things the Fed has to take as given
is trade policy. And if in fact trade policy is going to push the
economy into a slump, that is a reason to cut interest rates ... If the
Fed comes in to bail him out you encourage bad behavior."
Fed Chair Jerome Powell and other officials insist they can only
consider what is happening in the economy and the appropriate policy
response, and not try to second guess what the administration does or
Trump on Monday renewed his attacks on the Fed, claiming that central
bank policy put him at a disadvantage in his trade negotiations with
China because that country, with closer political control of its central
bank, could devalue its currency or use other tools to offset the
tariffs Trump has imposed on Chinese imports.
"Our Fed is very destructive to us... They haven't listened to me,"
Trump said in a CNBC interview. "They're not my people."
In fact, Trump elevated Powell to the Fed leadership and appointed three
of the other four sitting Fed governors.
Trump has for a year berated the Fed for raising rates and other policy
steps that Fed officials say are the best way for keeping the recovery
under way. That broke a roughly 30-year run of presidents largely
staying away from specific policy recommendations for the Fed, even if
they were sometimes generically critical of the central bank.
Earlier this year, Trump threatened a fuller assault by considering the
appointment of two highly partisan political allies to the central bank,
straying from a tradition of more technocratic appointments.
The surprise announcement in early May of higher tariffs on China and a
threatened imposition of levies on Mexican imports added to the
minefield the Fed must now navigate.
Though Trump in the end chose not to impose the tariffs on Mexico, the
prospect of using an economic lever for the non-economic end of border
control showed how in the Trump era policy could shift abruptly for
central bankers who try to keep their focus on medium- and longer-term
"We take all kinds of things...into account," St. Louis Fed President
James Bullard said last week before Trump called off the Mexican
tariffs. "There are some good policies in there. There may be some bad
policies in there. But we have to take everything into account."
NOT IN A BOX
Recent economic data are already complicating the Fed's job.
Policymakers have expected the economy to slow, but also regarded the
likely slowing as modest, and not enough to warrant a rate cut.
[to top of second column]
Federal Reserve Board Chairman Jerome Powell speaks at his news
conference following the closed two-day Federal Open Market
Committee meeting in Washington, U.S., May 1, 2019. REUTERS/Yuri
Gripas/File Photo/File Photo
The story shifted after Trump's latest trade war salvo.
"I don't feel backed into a box," to cut rates, Dallas Federal
Reserve bank president Robert Kaplan said last week. But "in the
month of April I might have said ... I was a little more optimistic
that the outlook was firming, and today I will tell you I am more
cognizant of risks to the downside. That is a pretty big change in a
relatively short amount of time."
Whether it is enough for the Fed to put a rate cut squarely on the
table will become clearer next week. Fed officials will hold their
policy meeting on Tuesday and Wednesday, and issue updated rate
projections. They will also have to decide whether to maintain their
"patient" approach to changing rates from the current range of
between 2.25% and 2.5%, or drop that description in a sign that they
are open to a move sooner rather than later.
Weak inflation readings like those in a New York Fed report on
Monday have already led Bullard to say that a rate reduction was
Analysts and markets, though, are split.
Bond markets have been aggressive in pricing in lower rates later
this year, and U.S. stocks have rallied hard in the past week on
optimism that a rate cut looked more likely, especially after last
week's weak jobs report. Economists at Goldman Sachs and elsewhere,
meanwhile, have discounted any pressure from Trump and argue the
economic outlook does not yet warrant a rate cut.
Rolling with the punches from political Washington is nothing new.
Former Fed chair Ben Bernanke complained when congressional spending
caps reduced economic growth just as the U.S. recovery was getting
traction and the eurozone was threatening to crack apart.
This problem here is different, though, with the Fed both under
political pressure and less certain, week to week, what actions of
the White House they may have to take into account.
After years in which U.S. central bankers bemoaned being "the only
game in town" influencing the economy, they may now be nostalgic for
those simpler times.
"The Fed has had too much on its plate for a long time," said Boston
College economics professor Peter Ireland. "Powell was taking pains
to say 'trade is trade' and that is not our business. But he has
gotten sucked into it."
(Reporting by Howard Schneider; Editing by Dan Burns and Andrea
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