Federal Reserve Chair Jerome Powell faced up to an uncomfortable reality Tuesday: More than he’d probably like, it’s President Trump’s world and he’s just living in it.
Addressing a conference in Chicago, the central bank chief suggested the Fed could cut interests rates if Trump’s trade war necessitates action to stabilize the economy.
"We do not know how or when these trade issues will be resolved," Powell said. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion."
It is not, Powell watchers agree, a scenario he would have created.
Trump has relentlessly needled Powell, in tweets and other public statements, to embrace a more accommodative monetary policy that would help boost economic growth and, in the president’s framing, give him a stronger hand fighting his trade wars:
The only problem our economy has is the Fed. They don’t have a feel for the Market, they don’t understand necessary Trade Wars or Strong Dollars or even Democrat Shutdowns over Borders. The Fed is like a powerful golfer who can’t score because he has no touch - he can’t putt!— Donald J. Trump (@realDonaldTrump) December 24, 2018
Powell has declined to respond directly except to say the Fed will continue to hew to a data-driven approach — or, to read a little more into it, that he won’t be bullied.
As recently as last month, Powell prompted a stock market sell-off when he threw cold water on the notion that the Fed might be cutting interest rates. He said at the time that inflation — which has bedeviled the central bank by lagging below its 2 percent target — was being suppressed by “transient” factors and therefore didn’t need a nudge from the Fed in the form of lower rates. “We don’t see a strong case for moving [rates] in either direction,” he said at the time.
But Powell just acknowledged, in his roundabout Fed-speak, that Trump’s trade wars could change the equation. Since his May statement, the president has escalated tariffs on Chinese imports and threatened more and, most recently, opened a new front by pledging to tax Mexican imports, starting next week.
Some economic forecasters say if Trump makes good on those threats, the U.S. economy could tip into recession. And the president's dialed-up hostilities come as evidence builds that global economic growth is stalling. Investors are now penciling in a 58 percent chance the Fed cuts interest rates by the end of July, a U-turn from just a month ago, my colleague Heather Long reports.
“He’d much rather have the president move before he has to,” Vincent Reinhart, a longtime Fed official who is now the chief economist for BNY Mellon Asset Management, told me.
That is, Trump backing off his tariff threats would make the Fed’s job a lot easier.
But Reinhart says Powell won’t try to anticipate what Trump might do. “You have to appreciate that it’s very hard for a central bank to move in advance of a political event. … You can say if the outcome is bad, you’ll respond by easing. But you don’t want to presume that politicians will do something to damage the economy, so he was careful not to say that” on Tuesday.
Nevertheless, Gregory Daco, chief U.S. economist for Oxford Economics, said Powell in his speech was demonstrating a new sensitivity to markets. “That was the message that carried through his speech,” he said. And the markets received it, with stocks seeing their biggest single-day gains since January after Powell’s remarks.
When it comes to actually acting, however, Daco says Powell will continue to focus on meeting the Fed’s dual mandate of maximizing employment and promoting stable prices — rather than responding to political pressure from the White House. “The Fed doesn’t want to be caught in this political game,” he said. “That’s not the way the Fed acts and perceives things… It is a very difficult game from their perspective.”
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— Powell sends stocks soaring. NYT's Jeanna Smialek and Matt Phillips: "Equity markets — which had risen ahead of the remarks — piled up the gains in the hours after his statement. The S&P 500 rose 2.1 percent, its second-best daily gain of the year. The S&P is up 11.8 percent this year. The rally was broad based, with shares of large technology companies, financial institutions and industrial firms all rising more than 2 percent. The tech-heavy Nasdaq composite index rose more than 2 percent. An index of semiconductor manufacturers rose more than 4 percent.
"The rebound in stock markets coaxed some investors out of the safety of government bonds, pushing prices down and yields — which move in the opposite direction — up."
— Global economy stalls. WSJ's Josh Zumbrun: "The global economy has stumbled sharply in the first half of the year with trade and investment flows between countries falling faster than expected, according to semiannual forecasts released by the World Bank on Tuesday. With nearly half a year of data under its belt, the World Bank lowered its global growth forecast to 2.6% from 2.9% in January—and cut its forecast for growth in trade to 2.6% from 3.6%...
"The global economy’s growth will be the weakest since 2016, while trade growth is on track to be the weakest since the global financial crisis more than a decade ago, according to the bank. The World Bank’s forecasts suggest the toll that ongoing trade conflicts are taking on the global economy."
— GOP Senators mull blocking Trump's Mexican tariffs: "Defiant Republican senators warned Trump administration officials Tuesday they were prepared to block the president’s effort to impose tariffs on Mexican imports, threatening to assemble a veto-proof majority to mount their most direct confrontation with the president since he took office," my colleagues Erica Werner, Seung Min Kim, Damian Paletta and Mary Beth Sheridan report.
"During a closed-door lunch on Capitol Hill, at least a half-dozen senators spoke in opposition to the tariffs [Trump] intends to levy next week in an attempt to force Mexico to limit Central American migration to the United States. No senator spoke in support, according to multiple people present who spoke on the condition of anonymity to discuss the private meeting."
This is a potentially very big deal as it would mark one of the only times Republicans in Congress have stood up to the president on a hallmark issue as the 2020 election gets underway in earnest. That is, if they follow through on their threats -- and Trump does as well on his warning he will impose tariffs next week on Mexican imports.
- “There is not much support in my conference for tariffs — that’s for sure,'" said Senate Majority Leader Mitch McConnell (R-Ky.). He said senators hope that negotiations with Mexico will be “fruitful” and that the tariffs will not happen. Most GOP senators strongly oppose tariffs because they view them as taxes on Americans," according to my colleagues.
- Republicans say they have enough votes in the Senate to override a veto of a previous congressional measure rejecting Trump's declaration of an emergency on the southern border. But, crucially, the House wouldn't likely have the votes for such a rebuke of the president.
- And Trump isn't happy: He said it would be "foolish" for GOP senators to try and stop tariffs on Mexico.
White House's legal rationale for Mexican tariffs is untested: "[Trump] is once again sailing in uncharted legal and constitutional waters," my colleague Fred Barbash reports. "His promise to punish Mexico with escalating tariffs unless it controls what he calls the 'invasion' of migrants across the southern border is premised on a law that has never been used either as a tool of immigration policy or tariffs. The International Emergency Economic Powers Act (IEEPA) mentions neither."
— A U.S.-U.K. trade deal won't be easy. Julia Horowitz of CNN Business: "A trade accord with the United States has been touted as a potential benefit of Britain leaving the European Union. Trump and Prime Minister Theresa May both emphasized the promise of an agreement during a joint press conference on Tuesday.
"But Britain can't open negotiations with potential partners until it leaves the European Union, and the country's plans for Brexit are in tatters. May is about to stand down and what happens next is anyone's guess. Once formal discussions on a US-UK trade deal can start, they're likely to last years and could be doomed by a thorny set of political issues."
Trump reconsiders whether Britian's health service should be on the table for trade talks: “[Trump’s] news conference in London on Tuesday with [May] was supposed to underline how great a free-trade deal with the United States would be if Britain finally leaves the European Union,” my colleague Adam Taylor reports. “Instead, Trump may have inadvertently played into some of Britons’ worst fears about their post-Brexit future when he suggested that Britain’s National Health Service (NHS) could be a part of a U.S.-Britain trade deal.”
"Trump’s vague answer to the question may suggest he hadn’t given the idea much thought. He may already be reconsidering his position. British journalist Piers Morgan wrote on Twitter earlier in the day that Trump had made a 'stunning U-turn' on the issue in an interview conducted shortly after Tuesday’s news conference."
— Mnuchin, Chinese central banker will meet at the G20. Reuters: "Treasury Secretary Steven Mnuchin is scheduled to meet with People’s Bank of China Governor Yi Gang this weekend at a gathering of G-20 finance leaders in Japan, marking the first face-to-face discussion between key U.S. and Chinese trade negotiators in nearly a month."
U.S. companies fret: “The sudden deterioration in trade talks between the United States and China last month has ratcheted up concerns among U.S. firms that the dispute could go beyond tariffs and affect business in the long-term,” Reuters’ Brenda Goh reports. “Business associations and consultants say they have been fielding a growing number of inquiries from companies about how best to navigate the trade dispute.”
“Further rattling nerves are Beijing’s plans to unveil an unprecedented hit-list of ‘unreliable’ foreign firms, groups and individuals that harm the interests of Chinese companies. China’s commerce ministry announced the move on Friday without singling out any country or company.”
China issues travel warning for U.S. “China issued a travel warning for the U.S. on Tuesday, saying Chinese visitors have been interrogated, interviewed and subjected to other forms of what it called harassment by U.S. law enforcement agencies,” CBS News and the Associated Press report. “The warning urges Chinese citizens and Chinese-funded bodies in the U.S. to step up their safety awareness and preventative measures and respond ‘appropriately and actively.’ It was issued by the foreign ministry, as well as the Chinese Embassy and consulates in the U.S.”
Farmer sentiment hits new low amid trade war: “Farmer sentiment plunged in May to its lowest level in nearly three years as the trade war with China escalated and concerns about economic conditions grew, according to a survey released Tuesday,” CNBC’s Jeff Daniels reports.
“May’s Purdue University/CME Group Ag Economy Barometer declined 14 points from the prior month to a reading of 101, which is the lowest point since October 2016.”
— Nearly every state is suing Purdue Pharma: “California, Hawaii and Maine — as well as the District of Columbia — filed lawsuits Monday against Purdue Pharma, bringing the total number of states accusing the OxyContin maker of helping to ignite the nationwide opioid crisis to at least 48,” CNBC’s Berkeley Lovelace Jr. reports.
“Like those of other states, the new lawsuits accuse the privately held company and its owners, the Sackler family, of downplaying the risks of addiction to OxyContin while exaggerating its benefits.”
— Walmart is courting high-school employees: “Walmart, the nation’s largest private employer, is hoping to win over a new group of workers: high school students,” my colleague Abha Bhattarai reports.
“The retail giant said Tuesday it will begin offering free SAT and ACT prep courses, as well as more predictable schedules and debt-free college funding, to its employees as it tries to attract workers in a competitive labor market. Walmart is also expanding its $1-a-day college education program to include degrees in cybersecurity, computer science and other technology fields for its 1.5 million U.S. workers.”
— Joe Biden calls on 2020 fundraisers to pony up: “If you want to be a member of the national finance committee for Joe Biden’s 2020 presidential campaign, be prepared to raise up to $100,000,” CNBC’s Brian Schwartz and John W. Schoen report.
“The former vice president’s campaign is calling on its network of bundlers to help put together thousands of dollars in contributions. There are four tiers of fundraisers in the Biden system, according to an invitation CNBC obtained through a donor who recently sent in a contribution.”
— Warren calls for massive jobs program. NYT's Astead Herndon and Patricia Cohen: "Senator Elizabeth Warren of Massachusetts on Tuesday proposed an economic program of “aggressive intervention on behalf of American workers,” suggesting that as president she would invest $2 trillion in climate-friendly industries over a decade, create a new cabinet-level Department of Economic Development and even manipulate the dollar to promote exports.
"Unveiling a campaign theme of 'economic patriotism,' Ms. Warren promised to announce further plans under that banner over the next several months, on issues like trade and Wall Street regulation. By pledging to intervene in markets to support American manufacturing and promote job creation, Ms. Warren laid out a goal that [Trump] has also pursued, albeit by different means, like imposing tariffs on imports from China and Mexico."
— Senior OCC official faces bullying probe. Politico's Victoria Guida: "The top human resources official at the Office of the Comptroller of the Currency is under an internal investigation over claims of bullying and harassment, allegations that echo complaints against her in a previous government position, according to interviews and documents obtained by POLITICO.
"Cassandra Cuffee-Graves, hired as deputy comptroller for human capital at the bank regulator in April 2018, has created a hostile work environment in which employees feel belittled and afraid to speak up, five OCC staff members said in interviews. Multiple employees argued that Cuffee-Graves was not properly vetted before being given the job, raising broader questions about hiring practices at the agency, which oversees national banks."
— SEC poised to clash with Democrats on best-interest rule. Politico's Patrick Temple-West: "The SEC is poised to deliver a victory to business groups by adopting rules for financial advisers aimed at curbing conflicts of interest but stopping short of a stricter Obama-era regulation that the industry successfully challenged in the courts.
"The so-called best interest regulation, which the SEC is expected to approve on Wednesday, also represents a personal triumph for Chairman Jay Clayton, a [Trump] appointee who vowed to come up with his own regulation after President Barack Obama's 'fiduciary rule' was tossed. Clayton says the new regulation will benefit consumers. But if the SEC adopts the rule without changes from the original proposal, it will put Clayton in the crosshairs of House Democrats, who see it as toothless; key state regulators, who are promoting stricter standards in their own jurisdictions; and investor advocates."
- The American Enterprise Institute holds an event with International Monetary Funding Managing Director Christine Lagarde.
- Five Below and Vera Bradley are among the notable companies reporting their earnings Wednesday, per Kiplinger.
- AEI holds an event on high school credit recovery programs Thursday.
- The National Economists Club holds an event with the Center for American Progress’s Lawrence Korb on Thursday.
Meet Larry the cat, British sensation: