Donald Trump took another pop at Fed Chairman Jerome Powell towards the end of this week, blaming the Fed for preventing the US economy from achieving its full potential.
The Twitter attack comes at a time of increasing talk of recession across the US mainstream media and amongst economic commentators. And although the US numbers themselves remain relatively healthy, particularly in the context of what’s happening elsewhere in the developed world, Mr Trump is cognizant of the risk that his tariff war will cop the blame in the event of any meaningful slowdown.
It’s not that, he says, it’s the Fed. Why? Because other countries, like China, have been able to devalue their currencies in the face of US economic pressure in the way that Mr Trump himself is powerless to do. That prerogative is reserved for Mr Powell, and thus far, as the minutes from the most recent Federal Open Markets Committee meeting show, he has been decidedly reluctant.
For the Fed, at least until the end of last year, the risk was at the opposite end of the spectrum: that the US economy might overhead in an environment of easy money and then crash. What’s happened instead has been an orderly slowing of growth such that the danger or recession, when all’s said and done and in spite of alarmist talk in the media, still seems a long way off.
Nevertheless, there are clouds on the horizon. In his angst about the strong dollar Mr Trump also railed against interest rates in Germany, where yields on certain types of bonds are negative. That, argues the President, is hard to compete with.
On the other hand though, Mr Trump wouldn’t want the type of economic numbers Germany is returning at the moment, and which those rates are partly a response to. The risk that Germany will go into recession is actually tangible – it’s just returned a quarter of negative growth and the outlook for the current quarter isn’t exactly rosy.
Most of the world, perhaps with the exception of China, will be looking across the various oceans to Washington with envy. Would that every country had economic troubles like the US’s, where growth remains above 2%.
Nevertheless, as Mr Powell recognises, there is a very real possibility that the troubles in the wider world will eventually come back to bite the US economy too. With the rate of economic growth in China slowing, with Germany and the UK both in negative territory, with the Brexit uncertainty continuing to dampen sentiment, with the Argentinian economy on the point of collapse and South Korea and Japan engaging in their own private trade war, there’s plenty to be worried about.
Where is any increase in demand going to come from for US exports with all these issues floating around? Mr Trump’s solution – to weaken the US currency – is a palliative at best. It may make US goods cheaper, but it doesn’t help the wider global economy towards any sort of recovery.
Not that Mr Trump himself is being inconsistent. He ran his 2016 campaign on a platform of economic nationalism, and competitive currency devaluation fits squarely into that category.
Whether it will work is another matter though.
The unofficial narrative coming out of the Fed is that the recent rate cut was precipitated by the economic uncertainties created by Mr Trump’s tariff policies, and not by any more fundamental weakness in US domestic performance. In a sense this means that the Fed and Mr Trump are on the same page. Both argue that the US economy is strong. The question is what policy to adopt in response.
Ironically the Fed only seems to be willing to drop rates if Mr Trump manages to disrupt global demand. That means that for Mr Trump to get the additional rate cuts he requires, he’ll have to do further damage to the global economy.
But that in turn will make recession more likely in the US, which is why the mainstream media has begun playing with that narrative.
Who will blink first? In a sense Mr Trump already has, with the pre-Christmas mitigation of tariffs announced on 13th August. But that was just tactical. The questions of broader strategy remain to be decided.