Mark “Violates the Fed’s independence” on your Trump norm-shredding bingo card. That the president’s criticism of the Federal Reserve on Thursday felt so unsurprising made it no less alarming to a lot of market watchers.
President Trump’s comments to CNBC knocking the Fed for raising interest rates ended a quarter-century tradition of presidential silence on monetary policy. “I’m not thrilled,” Trump told the network’s Joe Kernen, in an interview that will air in its entirety today. “Because we go up and every time you go up they want to raise rates again. I don't really — I am not happy about it. But at the same time I’m letting them do what they feel is best.”
Watch Trump here:
The stock market shrugged off the president’s remarks and the dollar lost ground, then recovered some. But some Fed experts say Trump crossed a line that will create dangerous pressure on the central bank if he keeps it up.
Sebastian Mallaby — a senior fellow at the Council on Foreign Relations and author of “ The Man Who Knew,” the definitive biography of former Fed chair Alan Greenspan — pointed to the open seats on the Fed’s seven-seat board of governors as potential leverage for the president if he wants to try to more actively steer Fed policymaking (there are four, and Trump has nominated three people who are awaiting Senate confirmation). “I think the existence of the vacancies does put pressure on Powell,” Mallaby tells me.
Powell just last week said he can’t be swayed by political pressure. “We have a long tradition here of conducting policy in a particular way, and that way is independent of all political concerns,” the Fed chief told Marketplace radio. He was responding to comments from Larry Kudlow, National Economic Council director, that presaged Trump’s criticism of the bank’s rate-hiking pace. “I would add, though, that no one in the administration has said anything to me that really gives me concern on this front,” Powell added. “But this is deep in our DNA.”
Yet Powell is no Washington neophyte. In 1990, he became undersecretary for finance at the Treasury Department, serving under then-Treasury Secretary Nicholas Brady. Toward the end of that year, Brady sought to push Greenspan, then the Fed chair, to lower interest rates faster — in part by filling vacant Fed slots with growth-minded economists. “Powell has seen how the politics between the Treasury and the Fed work at a time of disagreement, and he’s very well aware of the limits to the Fed’s independence,” Mallaby says.
The first Bush administration was only keeping up the practice of its predecessors, for whom criticizing the central bank was squarely inbounds, as this pair of headlines from the Carter and Reagan eras demonstrates:
It fell to Bush’s successor — and more specifically, his first Treasury Secretary, Robert Rubin — to institute a hands-off policy that administrations have respected since, as The Wall Street Journal’s Nick Timiraos noted last week.
Most Fed watchers agree that by breaching the norm, Trump’s remarks stand to backfire, if they make any difference. That is, in the wake of the president's criticism, Fed policymakers could take a more hawkish view toward interest rates to demonstrate they aren’t bowing to White House pressure. The Fed has raised interest rates a quarter-point twice this year, and most Fed officials now project they will do so twice more — up from three hikes they had anticipated — as the economy continues to strengthen. “The idea of presidents never criticizing or pressuring the Fed is exaggerated,” says Adam Posen, president of the Peterson Institute for International Economics. “They often have, and the Fed is able to stand up to them, usually.”
But that could change, Posen says, “if he were to sustain this and make it an ongoing theme.” In that case, “I’m not sure it will work, but we’ll be able to tell,” he says.
Trump acknowledged his comments would stir controversy in the CNBC interview. “Now I’m just saying the same thing that I would have said as a private citizen,” he said. “So somebody would say, ‘Oh, maybe you shouldn’t say that as president.' I couldn’t care less what they say, because my views haven’t changed.” The White House nevertheless felt compelled to clean up the comments, issuing a statement later insisting the president “of course… respects the independence of the Fed. As he said he considers [Powell] a very good man and that he is not interfering with Fed policy decisions.”
That marked the third time this week the administration tried to revise remarks Trump made off the cuff. But Stephen Myrow, managing partner of Beacon Policy Advisors, predicts the president will return to his Fed criticism, “if and when the economy falters.”
And that carries a grave risk. “One of the Fed's most important assets, beyond their balance sheet, is their credibility,” Myrow says. “This is a direct attack on the political independence of the Fed.”
Former Treasury Secretary Larry Summers put a sharper point on it:
It’s a fool’s game. Now hard for Fed to be dovish without looking weak and political, even if dovish policy is what they think is appropriate.— Lawrence H. Summers (@LHSummers) July 19, 2018
That is part of the reason why wise Presidents respect Fed independence.— Lawrence H. Summers (@LHSummers) July 19, 2018
Likely result of Presidential intervention is higher rates as Fed needs to assert its independence— Lawrence H. Summers (@LHSummers) July 19, 2018
Attacking central bank is one more step in what seems like a Presidential strategy of turning the United States into a banana republic.— Lawrence H. Summers (@LHSummers) July 19, 2018
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— Trump threatens dramatic escalation with Beijing. CNBC's Jeff Cox: Trump has indicated that he is willing to slap tariffs on every Chinese good imported to the U.S. should the need arise. 'I'm ready to go to 500,' the president told CNBC's Joe Kernen in a 'Squawk Box' interview. The reference is to the dollar amount of Chinese imports the U.S. accepted in 2017 — $505.5 billion to be exact, compared to the $129.9 billion the U.S. exported to China, according to Census Bureau data. Thus far in the burgeoning trade war, the U.S. has slapped tariffs on just $34 billion of Chinese products, which China met with retaliatory duties. By sheer dollar volume, the Chinese won't be able to come close to the U.S. in a tit-for-tat battle. Trump's comments point to a willingness to push the envelope as far as the U.S. needs to get Chinese tariff concessions, along with a pledge to stop stealing American technology. 'I'm not doing this for politics, I'm doing this to do the right thing for our country,' Trump said. 'We have been ripped off by China for a long time.'"
— Trump blasts Europeans. The Washington Post's Tony Romm and James McAuley: “Trump on Thursday attacked the European Union over its decision to fine Google $5 billion for harming its competitors, tweeting that the incident proved the regional bloc has 'taken advantage of the U.S., but not for long!' To Trump, the fine appeared to serve as the latest evidence of Europe’s exploitation of the United States on a variety of matters, including trade and other nations’ contributions to defense spending, and it came a day after he threatened 'tremendous retribution,' particularly on European-made cars if the E.U. doesn’t change its policies. European leaders, however, showed no sign of backing down Thursday — with one official pledging in Brussels that they could adopt their own 'rebalancing measures' if the U.S. government proceeds fresh new auto tariffs.”
— No decision on autos yet. The Wall Street Journal's Josh Zumbrun and Chester Dawson: “Commerce Secretary Wilbur Ross said Thursday that it is 'too early' to say whether the Trump administration will move ahead with proposed tariffs of up to 25% on imported vehicles and auto parts. Speaking ahead of a hearing in Washington, Mr. Ross said the government is still analyzing whether it will impose tariffs on national security grounds, following a similar move on metals imports earlier this year. 'It’s obvious by the attendance here this morning how vital this industry is to the U.S. and global economy,' Mr. Ross said.”
Self-driving cars could suffer. The Post's David J. Lynch: “One casualty of such protectionism would be breakthrough technologies for self-driving vehicles. ... Research into the technologies needed to make self-driving and electric vehicles a consumer staple is expected to be so costly that most companies will base their main development work in a single location, industry executives said. General Motors has warned that the tariffs 'could delay breakthrough technologies and threaten U.S. leadership in the next generation of automotive technology.'”
— China avoids K Street. Politico's Adam Behsudi and Marianne Levine: “Even though Chinese firms stand to lose the most from Trump’s aggressive moves, only a handful of the very largest — such as tech giants ZTE and Huawei — have lobbyists on retainer or staff in the U.S. The reason is largely cultural and historical. Many Chinese firms are partly government-owned, and they’re used to relying on officials in Beijing or their American business partners to fight for their interests. But they could be missing opportunities to get their products off Trump’s growing tariff lists. And advocates for Chinese investment in the U.S., which has plummeted to a seven-year low, fear the silence is just contributing to an increasingly hostile environment.”
— Qualcomm stuck waiting. The New York Times's Don Clark: “Steve Mollenkopf, the chief executive of Qualcomm, has been waiting for a phone call with news from China. It has been a long wait. His company, which makes chips that help mobile phones communicate, has been on extended hold while the Chinese authorities review a deal that Qualcomm struck 20 months ago to buy another chip maker, NXP Semiconductors. Mr. Mollenkopf said Qualcomm had done all it could to persuade Beijing to approve the $44 billion transaction, which the companies have said will be terminated next Wednesday without regulatory consent. But both the acquisition and Qualcomm have now become entangled in the trade war raging between the United States and China.”
— Farmers' limited options. The Associated Press's Steve Karnowski and Blake Nicholson: “Many anxious American farmers are delaying purchases and investment while hoping for a truce in a U.S.-China trade war that has left their crops at a competitive disadvantage overseas. The longer the Trump administration’s tariffs remain in place, the more China’s retaliatory tariffs against American exports stand to hurt U.S. soybean and pork producers. ... 'From a farmer’s perspective all you can do is wait and hope, which aren’t very good options,' said Michael Petefish, who grows soybeans and corn near Claremont in southern Minnesota. 'If you can afford not to be selling your beans now, just put them in the bin and store them and wait for better markets. That’s about all you can do.'”
— Pain in Spartanburg. NYT's Natalie Kitroeff: “The Spartanburg plant is BMW’s biggest in the world. It has helped draw more than 200 companies from two dozen countries to Spartanburg County. And the German company — not an American icon like Ford or General Motors — is now the largest exporter of cars made in the United States, turning the port of Charleston, S.C., into a hub for global trade. But by setting off a global trade battle . . . Trump is threatening the town’s livelihood. People aren’t happy. ... Already this year, BMW stopped exporting the X3 crossover from Spartanburg to China and began making more of the S.U.V.s in plants in Shenyang, China, and Rosslyn, South Africa. It announced last week that it would increase production capacity to 520,000 vehicles in its two Shenyang plants next year, overtaking the total production in Spartanburg.”
— Tensions rise as Trump invites Putin to Washington. The Post's Shane Harris, Felicia Sonmez and John Wagner: "The White House announced Thursday that Vladimir Putin has been invited to Washington this fall, even as leaders in Washington tried to fully understand what happened when President Trump and the Russian leader met earlier this week in Helsinki. White House press secretary Sarah Huckabee Sanders announced the planned visit in a tweet, saying that national security adviser John Bolton extended the invitation and that 'discussions are already underway.'
"As the late afternoon tweet landed, Director of National Intelligence Daniel Coats was on stage at the Aspen Security Forum in the middle of an interview with NBC’s Andrea Mitchell, who broke the news to him. Coats, clearly surprised, took a deep breath. 'Say that again,' he said. 'Did I hear you?' She repeated the news. 'Okaaaay,' Coats said. 'That’s going to be special.'”
— Yuan recovers after slumping. Bloomberg: "China’s markets ended Friday on a stronger footing, with the yuan reversing an early slump spurred by the central bank’s move to weaken the daily currency fixing by the most since 2016... The yuan’s decline of more than 4 percent over the past month, the steepest among major currencies, has provoked fresh speculation about whether the decline is a natural consequence of policy easing efforts to cushion a slowing economy, and how far officials will let it go... Trump told CNBC that the currency is 'dropping like a rock,' putting America at a disadvantage as trade tensions escalate. 'The PBOC will only let the yuan devalue in an orderly fashion at best, instead of letting it depreciate freely, in order to avoid the risk of capital flight,' said Ngan Kim Man, co-head of treasury at China Everbright Bank Co.’s Hong Kong branch."
— Jobless claims dip. Reuters's Lucia Mutikani: “The number of Americans filing for unemployment benefits dropped to a more than 48-1/2-year low last week as the labor market strengthens further, but trade tensions are casting a shadow over the economy’s outlook... Fewer manufacturers planned to increase capital spending, suggesting trade tensions, marked by tit-for-tat import tariffs between the United States and its trade partners... could be starting to hurt business sentiment.”
— Wells tries to make amends. WSJ's Emily Glazer: “Wells Fargo . . . & Co. is in the process of refunding tens of millions of dollars for products ranging from pet insurance to legal services added to hundreds of thousands of customers’ accounts without their full understanding, according to people familiar with the matter. Known as add-on products, Wells Fargo for years charged monthly fees to customers for dozens of products they didn’t understand or know how to use, the people said. The Consumer Financial Protection Bureau is probing the matter, the people said. The agency is focusing on whether customers were deceived, their awareness of the products and their ability to cancel the products, one of the people said.”
— Comcast drops Fox bid. The Post's Steven Zeitchik and Tony Romm: “Comcast said Thursday it was withdrawing from the race to buy key portions of 21st Century Fox, removing Disney’s last significant hurdle for the historic acquisition. The news clears the way for Disney to pay $71.3 billion for the majority of 21st Century Fox assets, including film and television studios and cable channels in the United States and around the world. Those assets are in great demand as legacy media companies seek to scale up to take on tech players such as Netflix and Apple, which increasingly are becoming content power players. In a statement, Comcast said that it would instead focus its efforts on bidding for a majority stake in European pay-TV service Sky, which Fox also has been chasing.”
— Goldman Sachs adds outsiders. WSJ's Liz Hoffman: “For years, Goldman Sachs... Group Inc. rarely hired from the outside, guarding its culture with an insularity that, to rivals, bordered on arrogance. Not anymore: Goldman has brought in 15 outsiders at the elite rank of partner over the past year, the biggest influx of senior executives in two decades. More are expected as the firm plugs weak spots in its network of investment bankers, builds out new businesses in consumer and commercial banking and replenishes trading ranks depleted by the post-crisis lull. The hiring push is an acknowledgment that Goldman, which is trying to add $5 billion in annual revenue by 2020, must look beyond homegrown talent to grow. And it comes as a former outsider is set to become Goldman’s next CEO: David Solomon, who will take over for Lloyd Blankfein in October, joined the firm as a lateral partner in 1999.”
— House finishes half its spending bills. The Hill: "The House on Thursday passed a package of two 2019 appropriations bills, marking the halfway point in its quest to pass the 12 annual spending bills needed to fund the government. Totaling $58.7 billion, the Financial Services bill and the Interior and Environment bills fund agencies including the IRS and various financial regulators, as well as the Environmental Protection Agency (EPA), the Interior Department and a series of popular arts programs... The full Senate has not yet passed its versions of the bills but is expected to take them up next week, potentially alongside spending bills covering Agriculture and Transportation, Housing and Urban Development. The two chambers have until Oct. 1 to pass all 12 appropriations bills, iron out the differences and send them to the president’s desk for signature, a feat Congress has been unable to accomplish on time in over two decades."
— Kraninger grilled. The Post's Renae Merle: "Kathy Kraninger, President Trump’s nominee to lead the Consumer Financial Protection Bureau, repeatedly dodged questions from Senate Democrats on Thursday about issues facing the watchdog agency and her involvement in the administration’s 'zero-tolerance' immigration policy. Kraninger, a White House budget official, emerged largely unscathed from the more than two-hour hearing before the Senate Banking Committee, during which she told lawmakers that the bureau would be 'fair and transparent' under her leadership...
"The hearing marked Kraninger’s first public statements since being nominated by Trump last month to lead the Consumer Financial Protection Bureau, a powerful banking regulator. Her nomination took much of Washington by surprise. Kraninger has decades of experience in homeland security, including helping set up the Department of Homeland Security after Sept. 11, 2001, but she has no record as a financial regulator. Her closest brush with the bureau appears to be her current role at the Office of Management and Budget in crafting Trump’s 2019 budget plan, which called for significantly cutting the consumer bureau’s budget and restricting its enforcement powers."
She had a particularly tense exchange with Sen. Elizabeth Warren (D-Mass.), who said Kraninger's involvement in the administration's child-separation policy is a "moral stain" that will follow her for the rest of her life. Watch it here:
.@SenWarren asks @CFPB Nominee about her role & thoughts about Trump administration's child separation policy. Warren concludes exchange "It is fundamentally immoral and you - you were part of it, Ms. Kraninger. It is a moral stain that will follow you for the rest of your life." pic.twitter.com/tZlegMi3je— CSPAN (@cspan) July 19, 2018
Warren later sent a fundraising appeal referencing the confrontation.
— Moving away from Libor. The New York Times's Matt Phillips: “As traders speculate about what will happen to financial markets when Libor disappears, regulators appear to be worried that banks are not taking the coming change seriously enough. To move away from Libor requires vast amounts of work, and given how tightly woven it is into the financial fabric, it isn’t the kind of thing anyone wants to see rushed. 'I hope it is already clear that the discontinuation of Libor should not be considered a remote probability,' Andrew Bailey, chief executive of Britain’s Financial Conduct Authority, said in a speech last week. Warning against 'misplaced confidence in Libor’s survival,' Mr. Bailey said that the number of financial contracts with interest rates derived from the benchmark continued to grow. Regulators in the United States, including the chairman of the Commodity Futures Trading Commission, have raised similar warnings.”
- Two House Small Business subcommittees hold a joint hearing on financial investment in rural areas on July 24.
- Senate Foreign Relations subcommittee hearing on Chinese “economic coercion” on July 24.
- Liam Fox, Britain's international trade secretary, delivers a speech on free trade at the Heritage Foundation in Washington on July 25.
From the New Yorker's Brendan Loper:
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