Ahead of Jerome Powell’s testimony on Capitol Hill Tuesday, markets were listening intently to see if the Fed chair would risk criticizing U.S. trade policy in light of comments he made at the ECB’s central banking forum in Sintra last month and considering the consternation tipped by the June Fed minutes.
In his prepared remarks, Powell made little mention of trade, reiterating what he said last week in an interview with American Public Media’s “Marketplace” program, during which he was steadfastly non-committal despite being pressed by host Kai Ryssdal.
“It is difficult to predict the ultimate outcome of current discussions over trade policy”, Powell said on Tuesday morning.
But ultimately, he couldn’t dodge the issue entirely. In response to questions about the Trump administration’s determination to escalate trade tensions both with China and with America’s allies in Canada and Europe, Powell said the following:
In general, countries that have remained open to trade, that haven’t erected barriers including tariffs, have grown faster. They’ve had higher incomes, higher productivity. Countries that have gone in a more protectionist direction have done worse.
Right. And again, everyone knows that. Besides being common sense, it’s a demonstrable fact. It cannot be refuted. No amount of inflammatory rhetoric from academic outcast Peter Navarro can change it and no amount of jingoism from President Trump can rewrite the history of globalization.
Powell also reiterated his message from Sintra and underscored what was buried in the Fed minutes. Namely this:
We don’t see it in the numbers yet, but we’ve heard a rising chorus of concern which now begins to speak of actual capex plans being put on ice for the time being.
What’s disturbing is how cautious Powell was when it came to answering questions from lawmakers. He appeared reluctant to address it when the subject was broached and his assessment (excerpted above) came after a lengthy effort to justify his decision to answer. Watch this:
Jerome Powell on trade: “Countries that have remained open to trade…have grown faster and they’ve had higher incomes, higher productivity. And countries that have gone in a more protectionist direction have done worse.” Watch LIVE ??https://t.co/EwmcnkM9bx pic.twitter.com/R3FG6UMXn0
— Bloomberg Economics (@economics) July 17, 2018
What is that about? Listen to that again:
I have to start by saying that I’m really firmly committed to staying in our lane.
I think that speaks for itself.
I’ve said this before, and I’ll say it again. It’s just a matter of time before it starts to become apparent that Trump is putting pressure on the Fed. That’s not to suggest the Fed has ever been wholly “independent”, but I contend that Powell feels like he’s walking on egg shells with the trade issue.
I would also contend that Trump will demand rate cuts in the event his trade policies trigger a downturn in global growth that threatens to spillover into the U.S. whether through economic effects or, more likely, through financial channels (i.e., equities).
I’ve often quipped that we’re just a few thousand Dow points to the downside away from Trump adopting the Erdogan strategy when it comes to monetary policy.
Do me a favor and read the following quotes from a speech Erdogan made back in November when inflation was spiraling out of control in Turkey and the lira was plunging (incidentally, the FX and inflation situation have not improved in Turkey since):
They say central banks are independent so we shouldn’t interfere. This is the end result because we haven’t interfered. Results speak for themselves.
We will solve this, things can’t go on like this.
Who does that sound like to you? I mean, besides Erdogan.
If you read the accompanying color from Bloomberg it’s even easier to imagine Trump going this route if Powell gets too aggressive. To wit:
Erdogan [is] vowing to step up a fight against what he calls the “interest rate lobby,” an alleged cabal of financiers and lobbyists that he says is conspiring to keep Turkey’s interest rates artificially high.
Before you know it, “the swamp” and the “American deep state” will include the Fed governors.
It’s almost too perfect a parallel and indeed, Trump and Erdogan have something in common when it comes to installing their sons-in-law in critical policy roles.
Some points:
Of course Powell feels like “he’s walking on egg-shells”. He knows damn well that any verbal misstep will be jumped on by an hysterical MSM – and even by thoughtful bloggers – to hit the guy who appointed him around the head. Actually, that’s the tenor of this post: ‘Damn the man, he didn’t give us any ammunition to aim at Trump’.
As for the ‘independence’ of central banks:
a. Why in hell should they be independent? They exercise a major public policy role which should be democratically controlled. If monetary policy has to be ‘independent’ because we don’t trust our elected public officials, then why not have independent fiscal policy, independent defence policy, and independent foreign policy? In fact why bother with elections at all – especially as the Russians apparently hack everything, everywhere, all the time?
b. Central banks have anyway never been fully independent of political influence in either their senior appointments or their policy-making, and they are certainly not independent of regulatory capture by the commercial banks that many (not all) are charged with supervising.
c. Since central bank ‘independence’ threw away its training wheels in the 90s these guys (and the occasional gal) have given us three massive asset bubbles and a global credit expansion whose demise will irreversibly change the structure of our economies and societies. They should never have been given the keys, and they’re now driving severely impaired under the influence of hubris and groupthink.
The Fed wants to be blameless for this economy now?
“I’ve often quipped that we’re just a few thousand Dow points to the downside away from Trump adopting the Erdogan strategy when it comes to monetary policy.”
This is the truth. Trump’s motivations, just like many of his cronies, will always ultimately come down to the (substitute: “his”) pocketbook. MAGA is a ideological front piece. I still say that it is going to ultimately come down to the NASDAQ. That’s going to be the red light. Any interest rate latitude will always be exploited, now that we’ve established historical precedent in its (over) use. It’s always going to be the go to drug of choice,
On the other hand, this whole trade thing might very well just be political posturing.