Jul 29, 2019

Trump ups the ante on his Fed feud

Illustration: Rebecca Zisser/Axios

Just as the Fed seems poised to announce the first interest rate cut since the financial crisis, President Trump took his feud with the central bank one step further, saying it "has made all the wrong moves."

Why it matters: In previous administrations, it would have been unthinkable for the president to publicly lobby for a rate cut, which Trump says will goose the economy. And even though Trump may have unintentionally gotten everything he's wanted from the Fed so far, he is pushing for even more. On Monday, he tweeted: "A small rate cut is not enough, but we will win anyway!"

Flashback: The first time that Trump, as president, publicly lambasted the Fed for raising rates was a little over a year ago in an interview with CNBC. From there, his criticism grew more frequent and intense. When asked about Trump's badgering, Fed chair Jerome Powell repeatedly pointed out that the Fed doesn't take politics into consideration when setting monetary policy.

  • In March, the Fed signaled it was done raising rates for the year. It also announced it would end its balance sheet reduction program — another point of contention for Trump.
  • A week later, Trump's top economic advisor, Larry Kudlow, told Axios that the Fed should actually cut rates, a sentiment that Trump echoed shortly thereafter in public comments and on Twitter.
  • In June, the Fed signaled it would cut interest rates. And on Monday — two days before the Fed's anticipated announcement — Trump said that a small rate cut would not satisfy him.

Between the lines: Trump has been more outspoken than any other president about what he wants from the Fed, whose leadership he helped shape. But it's impossible to tell if the shifts in the Fed's stance have been swayed by politics, and other factors — like economic turbulence and trade wars — have surely played a part.

  • "Trump got the Fed to cut rates, but had to damage the economy to do it," closely-followed Fed watcher Tim Duy wrote in a recent blog post.

Trump has used the Fed as a scapegoat, asserting how much stronger he thinks the economy would be if the Fed had halted policy tightening.

  • The clearest indication came on Friday, when Trump tweeted that 2% GDP growth — a drop from the prior quarter's 3.1% growth — was "not bad considering we have the very weight of the Federal Reserve anchor wrapped around our neck."
  • Asked on Monday to discuss the most recent tweets, the White House declined to comment.

The bottom line: The mere perception that the Fed is swayed by politics is a risk that's hurt other central banks around the world — most recently, in Turkey, where President Recep Tayyip Erdogan fired the bank's governor.

  • "If the market thinks that the Fed is just going to do whatever Trump wants, this could have very serious consequences," Brian Rose, an economist at UBS, tells Axios.
"The dollar is the world’s reserve currency and very widely held, but if there is a sense that the Fed will cave into political pressure it will undermine the foreign investors’ willingness to hold dollars. "

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