Powell Speaks, Congress Listens, The President Fumes

His appearances before a pair of congressional committees last week were the least of Federal Reserve Board chairman Jay Powell’s problems. His reputation for candor and the individual and small-group meetings he has held with 116 congresspersons in his 16 months in office assured a respectful reception and protection from a president threatening to fire him. “We in congress…got your back,” advised Democratic congressman from Georgia David Scott. One’s back is not normally the part of one’s anatomy it is safe to expose to a politician, but in this case Powell undoubtedly found the statement reassuring.

Yes, having the President who appointed you launching barrages of tweet attacks on your competence, coupled with threats to fire you, is unpleasant. And yes, it can be annoying to try to explain to a President who is, er, unsophisticated in economic matters that it might not be a good idea to lower interest rates drastically when the economy is growing smartly and anti-recession ammunition should be hoarded for possible later use. And to persuade a man who gleefully styles himself The King of Debt, several bankruptcies of his private-sector companies notwithstanding, that there will be a price to pay down the road for a fiscal policy so loose that annual deficits running around $1 trillion are projected as far ahead as the eye can see. A President gearing up for a tough battle to avoid a forced return to Trump Tower won’t settle for a growing economy: he wants one that will overcome the drag of his trade policy and “take off like a rocket”. And wants Powell to play NASA to the economy or find other work.

Powell has bigger worries than the President’s twitchy tweeter finger, first among them Trump’s decision to weaponize trade policy, to use tariffs that bar or make access to America’s massive market a weapon to bend adversaries and one-time allies to his will — “America First” makes little distinction between the two. Whatever the propriety of that policy, it adds to uncertainty, the bugbear of corporate investors. Tariffs have been levied on China to make it play fair in the world-trade game. Mexico, an important trading partner, has been told by Trump to stop funneling millions of Central Americans through its country to the US border or face ruinous restrictions on its exports, and by House speaker Nancy Pelosi that congressional approval of NAFTA 2.0, a trade treaty the President last week sent to congress for approval, is no sure thing. The European Union has been warned by Trump to lower barriers to American goods, or suffer the economic fate meted out to other nations that fail to believe that the President has reverted to the trade theories of 17th century mercantilist France.

“It appears that uncertainties around trade tensions … continue to weigh on the economic outlook,” Powell testified. Indeed. The President expects those uncertainties to produce at least a half-point reduction in interest rates later this month, and would prefer even more. He is likely to get only a quarter-point reduction because, as Powell noted, the US economy continues to do “reasonably well.” Whatever the cut, it will not be enough to suit Trump, who is preparing to blame the Fed for any downturn, which many analysts expect to hit early in 2020. Just in time to help voters decide whether four more years are due their tweeter-in-chief.

Powell also must concern himself with the state of the world economy, which is not good. Britain is racked by a war over whether it should leave the European Union –voters think it should, political and business elites, and now the Labour Party, think it shouldn’t — and is teetering on the brink of recession. In Germany, Europe’s largest economy, various economic indicators are at their lowest level in nearly a decade — manufacturing orders in May were 8.6% below last year’s level — prompting a Bloomberg headline, “German Recession Seems to Be Inevitable, Investor Survey Shows.”

The Italian and Greek economies labor under the weight of Germanic austerity policies, which Greece’s new Prime Minister, Kyriakos Mitsotakis and Italy’s coalition government are promising to force Brussels to change so that they can escape the austerity trap. Although Greece has a 40% youth unemployment rate and the Italian economy is at best stagnant, neither government is likely to find mercy in Brussels, where bureaucrats have no need to honor the promises made to constituents by their duly elected representatives. Most important, China’s highly indebted economy, its lenders’ balance sheets bloated with low-quality collateral, is staggering from Trump’s tariffs, with the effects rippling out to the many countries heavily dependent on exports to China to keep their economies humming. Germany is one such.

Then there is the situation at home. Powell must decide on interest-rate policy with the economy performing well but the Federal Reserve Banks of New York and Cleveland advising that their models set the probability of a recession in the next 12 months at 1-in-3, the highest in over ten years. And, like other central bankers, with little ammunition to use should one occur. Christine Lagarde, tipped to run the European Central Bank, says, “High public debt and low interest rates have left many countries with limited policy room for maneuver.”

Oh, yes. Trump believes the EU policy of low-to- negative interest rates, which Lagarde is likely to favor, is designed to drive down the value of the Euro relative to the dollar, and is crying “manipulation”. He wants Powell to produce interest rates low enough to drive down the dollar, emulating countries that have devalued their currencies to grow their economies. Turkey and Venezuela come to mind.