Fed Chair Jerome Powell is preparing to give President Trump what he wants in the form of lower interest rates. But his explanation for why the central bank is primed to turn dovish shouldn't please the White House.
The Fed this week decided against immediate action while signaling it could cut rates later this summer if the economic picture grows darker. And Powell made clear that will turn in part on whether Trump escalates his trade war, which he framed as a chief menace to extending the economic expansion.
Since the Fed’s last meeting in May, “apparent progress on trade turned to greater uncertainty, and our contacts in business and agriculture report heightened concerns over trade developments,” Powell said in a post-meeting news conference. “These concerns may have contributed to the drop in business confidence in some recent surveys and may be starting to show through to incoming data. Risk sentiment in financial markets has deteriorated, as well.”
Trump and his administration remain committed to the idea the president’s trade offensive represents a win-win for Americans. Hours before Powell’s statement, U.S. Trade Representative Bob Lighthizer, testifying before the House Ways and Means Committee, insisted against evidence that consumers aren’t bearing the burden of the administration’s tariffs. From Bloomberg News’s Shawn Donnan:
Lighthizer accuses economists of having a "hidebound notion" that consumers pay for tariffs. "I don't buy it at all."— Shawn Donnan (@sdonnan) June 19, 2019
Trump struck a similar note launching his reelection bid in a Tuesday night rally in Orlando. “We'll see what happens, but we are going to have a good deal and a fair deal or we're not going to have a deal at all, and that's okay, too,” Trump said of negotiations with the Chinese toward a trade pact. “Because we are taking in billions and billions of dollars into our treasury and companies are leaving China because they want to avoid paying these large tariffs … You're not paying very much if you're paying anything at all.”
Powell, who has labored to demonstrate he remains unperturbed in the face of Trump’s ongoing bullying, was clinical in his assessment of risks presented by the trade war. While “news about trade has been an important driver of sentiment” since the Fed’s last meeting, Powell said it is only one threat to U.S. growth. “It’s really trade developments and concerns about global growth that are on our minds,” he said. “So we’re not exclusively focused on one event or one piece of data.”
But the Fed chair was also curtly firm that he believes Trump lacks the power to remove him from his perch. “I think the law is clear that I have a four-year term, and I fully intend to serve it,” he said in response to a question from The Washington Post’s Heather Long about how he’d respond if the president tried to demote him.
(Trump, for his part, maintains that he has the authority to remove Powell as Fed chair but isn't planning to do so imminently, Bloomberg reported Wednesday night.)
Pushed later in the press conference to respond to Trump’s criticism, Powell said: “I don’t discuss elected officials publicly or privately, really. I would just say at the Fed, we’re deeply committed to carrying out our mission and also that our independence from direct political control we see as an important institutional feature that has served both the economy and the country well.”
The irony of Powell and Trump’s diverging views on the trade war is that it could lead the Fed chair to embrace Trump’s demands. If Trump and Chinese President Xi Jinping fail to make progress toward a deal when they meet on the sidelines of the G-20 summit in Japan next week, pressure would build on the Fed to follow through with the rate cuts it signaled Wednesday it is moving toward.
“If the summit ends badly, with no commitment from Presidents Trump and Xi to restart substantive negotiations or, worse, some sort of falling out, the stock market will tell the Fed to ease on July 31; they will oblige,” Pantheon Macroeconomics chief economist Ian Shepherdson wrote in a Wednesday note. “The Fed now needs a trade deal and a run of decent economic data to get off the hook it fashioned itself. We think they'll get lucky, but the scope for things to go wrong is huge.”
Not everyone agrees progress toward a trade truce with China will prompt the Fed to hold off on rate cuts. From University of Oregon economist Tim Duy:
I think they cut even with a G20 deal. They really entrenched rate cut expectations today and can easily justify pulling back the December rate hike. Beyond that, the trade deal/data matter.— Tim Duy (@TimDuy) June 19, 2019
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— Stocks edge toward record highs. NYT's Matt Phillips: "Stocks edged higher Wednesday, after the Federal Reserve indicated that a growing number of the central bank’s policymakers now expect to cut interest rates this year. The central bank held rates steady, but the indication about a future cut seemed to confirm the view of investors, who in recent weeks had become increasingly certain the Fed would act this year to counter economic headwinds related to the trade war... After the interest rate announcement, the S&P 500 finished the day up 0.3 percent. Defensive sectors such as health care and utility stocks, businesses that hold up well during periods of weak economic growth, led the market’s gains."
— Possible Fed pick wants lower rates ASAP. The Post's Heather Long: "Trump wants the Federal Reserve to cut interest rates and he’s looking to fill the remaining two spots on the central bank’s board with people who agree with his views. Conservative scholar Judy Shelton is the latest potential Fed candidate to catch the Trump team’s eye... Shelton has discussed a potential role on the Fed board with the White House and has begun the paperwork, she said, but she has not been formally nominated or mentioned by Trump...
"Shelton was an economic adviser to Trump’s 2016 campaign, holds a PhD in business administration from the University of Utah and says she would like to see the Fed cut rates steeply -- possibly to zero. 'I would lower rates as fast, as efficiently, as expeditiously as possible,' Shelton said in an interview this week in the lobby of Trump International Hotel in Washington."
Pelosi blasts Trump's Fed criticism. Bloomberg's Laura Litvan: "Speaker Nancy Pelosi defended the independence of the Federal Reserve on Wednesday, following comments from [Trump] hinting that [Powell’s] tenure depends on the Fed’s rate decisions. 'The last thing we need is a president threatening the chairman of the Fed' to get interest rates where he wants them, Pelosi told reporters at a breakfast hosted by the Christian Science Monitor. 'This is very very wrong.'"
— Lighthizer lays groundwork for Trump-Xi meeting. WSJ's William Maudlin: "Trump’s top trade negotiator said he plans to contact his Chinese counterpart as the Trump administration gears up for a high-level meeting next week to chart a path forward in the two nations’ trade dispute. Robert Lighthizer, the U.S. trade representative, told lawmakers on Wednesday that in the next day and a half, he would speak by phone a Chinese official, later identified as Chinese Vice Premier Liu He."
— CEOs meet with Chinese premier. Bloomberg: "A group of chief executive officers of American corporations are in Beijing this week to meet with China’s Premier Li Keqiang, as the simmering trade war ensnares companies from both countries. The heads of chemical giant Dow Inc., United Parcel Service Inc., drugmaker Pfizer Inc., Hyatt Hotels Corp., property developer Prologis Incand Honeywell International Inc., met with Li at Beijing’s Great Hall of the People -- home to the nation’s legislature -- on Thursday, according to a statement released by the Chinese government. Also at the meeting were 13 other global business leaders, including the heads of Volkswagen AG, Australian miner BHP Group, and Nokia OYJ...
"At the meeting, Li promised to open up more sectors of China’s economy to foreign investment, noting that the firms in attendance had both contributed to China’s economic development and profited from the local market."
— Blackstone CEO: No recession from U.S.-China fight. CNN Business: "One of America's top investors believes the trade war with China won't do enough damage to push the US economy into recession. Blackstone chief executive Stephen Schwarzman said Wednesday that while both countries are engaged in a 'high-wire act,' the damage would not cause a severe economic slowdown next year in the United States. 'It's not that big of a game to throw us into recession,' he told CNN Business in an interview. The assessment puts Schwarzman at odds with other investment professionals and economists who fear the trade war could cause a recession."
— Mexico ratifies USMCA. Politico's Sabrina Rodriguez: "Mexico’s Senate on Wednesday passed the USMCA, making it the first country to ratify the new North American trade pact. 'USMCA passes! Mexico goes first with clear signal that our economy is open,' Jesús Seade, Mexico's undersecretary for foreign affairs, wrote on Twitter. 'We're confident that our partners will soon do the same,' Seade added."
—Deutsche Bank faces criminal probe. NYT's David Enrich, Ben Protess and William Rashbaum: "Federal authorities are investigating whether Deutsche Bank complied with laws meant to stop money laundering and other crimes, the latest government examination of potential misconduct at one of the world’s largest and most troubled banks, according to seven people familiar with the inquiry. The investigation includes a review of Deutsche Bank’s handling of so-called suspicious activity reports that its employees prepared about possibly problematic transactions, including some linked to [Trump’s] son-in-law and senior adviser, Jared Kushner, according to people close to the bank and others familiar with the matter.
"The criminal investigation into Deutsche Bank is one element of several separate but overlapping government examinations into how illicit funds flow through the American financial system, said five of the people, who were not authorized to speak publicly about the inquiries. Several other banks are also being investigated."
— Budget impasse raises specter of a debt ceiling breach. Politico's Burgess Everett and Heather Caygle: "Congressional leaders and the Trump administration left a critical meeting on Wednesday still with no budget agreement, deadlocked over how much to raise domestic spending to avoid a fiscal calamity. Given the lack of progress, administration officials are pitching a short-term agreement to avoid breaching the debt ceiling and blunt budget cuts from the sequester in the fall. It’s uncertain whether Democrats will agree.
“'We are taking sequester off the table. We are prepared to do a one-year CR with a one-year debt ceiling,' said Treasury Secretary Steven Mnuchin. 'The president has every intention of keeping the government open.' Senate Minority Leader Chuck Schumer (D-N.Y.) panned Mnuchin's plan and blamed Majority Leader Mitch McConnell for sticking with the White House position."
— Senate Banking to probe Facebook digital currency. Reuters's Pete Schroeder: "Facebook Inc’s plans to create a global cryptocurrency will face scrutiny from the U.S. Senate Banking Committee on July 16, the latest sign that policymakers around the globe are casting a wary eye on the project. The hearing will explore the project, dubbed Libra, as well as any data privacy considerations it may raise, the committee said on Wednesday. No witnesses have been announced yet, according to a committee spokesperson. David Marcus, who oversees Facebook’s blockchain efforts, is expected to testify, according to a source in Washington familiar with the matter."
The company has already discussed Libra with the Fed, Jay Powell said Wednesday. Per the Fed chair: “Facebook, I believe, has made quite broad rounds around the world with regulators, supervisors and lots of people to discuss their plans and that certainly includes us." Via CNBC.
From The Post's Tom Toles: