Federal Reserve Board Chair Jerome H. Powell may not have wanted to cut interest rates. But in the end, President Trump appears to have given him no choice.
The move represented an about-face for Powell, who only last year steered the Fed through four interest-rate increases, citing the economy’s strength. But he attributed the cut to a global growth slowdown that has been caused in large part by Trump’s confrontational approach to trade.
Now, Powell — merely by fulfilling the Fed’s traditional role — is in effect enabling Trump to pursue his trade strategy without facing the full consequences at home.
“Powell’s in this extremely difficult situation,” said Michael Strain, a former research economist at the Federal Reserve Bank of New York. “He doesn’t want to compromise the Fed’s political independence because the president is badgering him to cut. At the same time, the trade war is a reality of the U.S. economy and the global economy, and the Fed has to be responsive to those realities.”
Eighteen months of on-again, off-again tariffs — and tariff threats — against products from China, India, Mexico, Canada, the European Union, South Korea, Japan, Vietnam and Guatemala have taken a toll on business confidence.
Caught in the crossfire, global manufacturers have been weakening for months. U.S. business investment in the second quarter fell 0.6 percent, the worst performance in more than three years.
Uncertainty caused by the president’s “America First” trade policies — perhaps the greatest threat to the record U.S. economic expansion — was a chief spur to Wednesday’s rate cut, Powell told reporters.
“Weak global growth and trade tensions are having an effect on the U.S. economy,” he said. “You see weak investment. You see weak manufacturing.”
For global companies doing business in or with the United States, much remains unknown. Negotiations with China, which once faced a March 1 deadline for results, now appear likely to drag on for months. A new North American trade agreement is languishing in Congress while the president has threatened to impose tariffs on imported automobiles and auto parts.
That means manufacturers such as BMW, which has its largest plant in the world in South Carolina, have “no clue at all about the trade and tariff regimes auto exports to and imports from the United States will face over the next year or even the next few months,” Carl Weinberg, chief international economist at High Frequency Economics, wrote in a client note earlier this month.
In a $21 trillion economy, the total tariff costs to date have been modest, Powell noted. But with the United States at the center of so many global supply chains, the uncertainty emanating from the White House is spreading doubt throughout global commerce, Weinberg said.
The president’s aggressive and unpredictable global trade overhaul has placed the Fed in an unfamiliar position. The nation’s central bankers are accustomed to monitoring banking conditions, prices and the labor market. They don’t usually need to track trade negotiations in real time.
“Trade is unusual,” Powell said. “We don’t — you know — the thing is, there isn’t a lot of experience in responding to global trade tensions. So it is something that we haven’t faced before and that we are learning by doing.”
Powell insisted that “we’re not in any way criticizing trade policy,” but his assessment was that the policy was hurting the economy. And despite presiding over the first rate cut in a decade, the Fed chairman got no applause from the president.
“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world . . . I am certainly not getting much help from the Federal Reserve!” the president complained on Twitter.
Fred Bergsten, a senior fellow at the Peterson Institute for International Economics, said the Fed and its chairman are at a historic juncture. “Powell’s right: It is unusual. The reason is Trump’s trade policy is unusual,” Bergsten said. “We haven’t had this kind of trade risk in the world economy for a very long time.”
Not since the mid-1980s, when the Reagan administration responded to persistent trade deficits by orchestrating a dramatic reduction in the value of the dollar, have trade and monetary policies been so closely intertwined, Bergsten said.
In 1985, the United States agreed with its major trading partners to coordinated action to drive down the dollar, thus helping American exporters sell more goods overseas. The Plaza Accord — named for the New York hotel once owned by Trump where negotiators haggled — dropped the dollar against the Japanese yen by about 50 percent over the next two years.
“All through that period, the Fed was reducing interest rates to reinforce the decline,” said Bergsten, a former Treasury Department official.
Pressure to speed those interest rate cuts ultimately resulted in an attempted coup against Fed Chair Paul Volcker. He put down the internal rebellion and helped steer global central banks in managing the dollar’s decline.
“With respect to Fed independence, what matters is how the Fed is perceived,” Strain said. “There’s a big question mark how this action will affect the perception of Fed independence, particularly if this is not the last time this situation occurs.”
Dean Baker, co-director of the Center for Economics and Policy Research, said the “erratic” nature of Trump’s trade policies is complicating Fed decision-making. The president’s sudden threat in late May to impose escalating tariffs on all Mexican goods entering the United States to force more aggressive Mexican border enforcement caught financial markets by surprise and led to a period where trade tensions threatened to run out of control.
“We are in really unpredictable territory,” Baker said. “The Fed has to look at trade policy now as something that’s completely unpredictable.”