Trump makes Fed chief economic punching bag

President Trump has turned his hand-picked Federal Reserve chairman into a political punching bag as dark clouds close in on the U.S. economy.

Trump has blamed Fed Chairman Jerome Powell for a series of economic setbacks, pinning a stock market slide and impending layoffs at General Motors on the central bank’s interest rate hikes.

While the U.S. still enjoys unemployment near record lows and solid economic growth, economists and policymakers are bracing for a slowdown or recession due before the next presidential election.

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If those fears materialize, Trump has set Powell up to potentially take the fall as the Fed attempts to weave a careful path forward amid economic uncertainty. 

“He’s finding an easily identifiable punching target,” said Brandon Barford, partner at Beacon Policy Advisors, “and it’s helping him deflect what could be challenging economic developments or circumstances from his own choices.”

“So far, I’m not even a little bit happy with my selection of Jay,” Trump told The Washington Post on Tuesday, using the chairman’s preferred name.

Trump appointed Powell, a Fed governor since 2012, to lead the central bank in November 2017, and he was confirmed in January to replace former Fed Chairwoman Janet Yellen, a Democrat, in a resounding 84-13 vote.

Trump and Powell, both Republicans, hold drastically different views on how the Fed should steer the U.S. economy through the end of the post-recession recovery. The central bank has been gradually raising interest rates since 2015 after slashing them to near-zero levels in 2008.

Trump has been open about his preference for lower interest rates and has blasted the Fed for cutting off stimulus despite low unemployment and strong gross domestic product growth. The president has called the central bank his greatest economic threat and a massive obstacle to his trade agenda.

“I’m doing deals, and I’m not being accommodated by the Fed,” Trump told the Post. “They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.”

Powell’s brain and Trump’s gut have been on a collision course since the chairman took control of the Fed in February. The Fed has raised rates three times under Powell and is expected to do so again in December.

Powell, like most Republicans, says it’s crucial to raise rates and cut back stimulus to the strong economy before cheap money spurs rampant inflation or financial market bubbles.

He defended the Fed’s policy path Wednesday in a speech to the Economic Club of New York.

“The interests of households and businesses, of savers and borrowers, were no longer best served by such extraordinarily low rates,” Powell said. “Our gradual pace of raising interest rates has been an exercise in balancing risks.”

U.S. stocks have also suffered through a volatile 2018 after a year of major gains, due in part to rising interest rates. Higher interest rates tend to suppress stock market gains — Trump’s preferred economic scorecard — by raising the price of borrowing and narrowing corporate profit margins.

But markets have also swooned in part over a series of red flags pointing toward an economic slowdown. While consumer spending has remained strong through the year, lagging home sales, business investment and exports point to a lack of long-term confidence.

The mounting costs of Trump’s trade battles with China and the European Union have also dragged global growth lower and put enormous economic pressure on U.S. industries and agriculture. Trump has claimed that Powell’s rate hikes are undercutting the U.S. against China.

This week, Trump has ratcheted up the criticism after GM announced plans to lay off 15,000 workers and close up to four U.S. factories. Those plans reflected long-term declines in U.S. car sales and a rapidly changing auto industry, but Trump on Tuesday pinned blame on Powell.

Trump is not the only critic of Powell, with Wall Street also accusing the chairman of being inconsistent with his economic messages, which some worry has made the stock free fall worse.

But Trump’s attacks on his Fed chairman have been unprecedented and put Powell in a difficult spot at a critical time. Powell has vowed to make the central bank more transparent to the public and lawmakers and to keep it out of political fights. Those goals are now being tested by the president’s criticism.

In the face of that criticism, Powell has found himself generally isolated, with Republican lawmakers shrugging off the president’s anger toward the central banker. Some Democrats, though, have cautioned Trump to not hamper the Fed’s independence or try to set up Powell to take the fall for economic troubles ahead.

“What President Trump is trying to do is very dangerous, because we cannot turn the Federal Reserve into a partisan operation that responds to any president’s daily whims,” Rep. John Delaney (D-Md.) said in a statement Wednesday. “President Trump is either fundamentally ignorant of the Fed’s role and purpose or he simply doesn’t care.”

The president, though, has shown no signs he is going to ease up on Powell. Trump last month said that he would not fire the Fed chief, but whether he can actually do so is a matter of legal debate. Some experts say the president can fire the chief “for cause” under the Federal Reserve Act, but many understand that to mean for wrongdoing, not over differences in policy.

Going forward, Powell must now make some tough decisions under withering public criticism from the president.

“The US labor market, which is what they’re worried about, has not weakened appreciably in recent cycles with real rates less than 2%,” wrote Ian Shepherdson, chief economist at Pantheon Macroeconomics, about the complicated economic picture. “Unemployment is at 49-year low, and falling.”

The Fed is likely to raise rates three to five more times within the next year. Powell, though, indicated Wednesday that the bank could slow down that process despite his confidence in the economy.

“Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy,” Powell said. Those remarks came almost two months after he said the Fed was “a long way” from a neutral stance on rates.

The Dow Jones Industrial Average rose more than 300 points, while the Nasdaq composite and the S&P 500 both shot higher around 12 p.m., moments after the Fed released remarks from Powell. The Dow closed the day up over 600 points.

Economic watchers agree that the pressure from Trump is unlikely to ease in the days ahead.

Any break in rate hikes or stock market surges could ease Trump’s frustration with Powell, but analysts warn that could be short-lived.

“The Fed has a lot more to do,” said Shepherdson.