Fed chief stuck between slowing economy and angry president

Mr. Trump's inflexible criticism of the Fed has led people in the central bank to feel fought to support the US economy and preserve the Fed's independence from political interference.

After cutting short-term interest rates last month, Powell, who became chairman in February 2018, is leading the Fed to further rate cuts, though conditions may change. The debate among his Fed colleagues is about the degree of rate change and timing, as well as the best way to frame the decision, which will be scrutinized by the markets and the White House.

Powell is scheduled to speak Friday at the Central Bank's annual conference in Jackson Hole, Wyo., A meeting that many hope will reveal clues to the Fed's next move.

Trump said the economy was slowing down because the central bank had raised interest rates too high last year, while many in the business community and within the Fed say the policies The President's commercial activities have caused market tensions and curtailed business investment.

Some analysts have said Powell has sometimes confused markets with Fed projects. His efforts to raise interest rates in December and his defense of further increases added to market volatility at the end of the year. In hindsight, these analysts said it was a mistake. Mr. Powell brought his colleagues to reverse the course in a few weeks.

The stakes are high all around. Wall Street forecasters have increased their chances of recession and the state of the economy in 2020 will affect Trump's re-election effort.

"I think our economy is very, very good," Trump said Sunday. "If it slowed down, it's because I have to face China and some other countries."

The president smashed Mr. Powell unknowingly after the markets tumbled last week, the latest in a long series of derogatory statements by Trump since Powell was named head of the Fed. Mr. Trump praised economic systems, as in China, where central banks are under strict control, a view that has raised concerns among current and former Fed officials.

"He explained in various interviews and tweets that he did not think the Fed should be independent," said the former Fed chairman.

Janet Yellen

Mr. Trump last week in an interview on Fox Business Network's "WSJ at Large" program.

The president's attacks "for all Fed presidents would be a reason to feel stress," Ms. Yellen said. "But you know I admire what President Powell has done. I think he's been trying to fix it.

Fed officials consider their independence essential to markets and the economy.

The central bank raised rates four times last year because the unemployment rate was down and inflation had reached the Fed target of 2%. Officials largely supported this decision as they expected inflation to continue climbing this year. The Fed has set aside plans to continue raising interest rates after unexpected inflation has slowed and market volatility has risen sharply at the end of 2018.

This year, uneven economic developments "have all called us to look and ask ourselves if we were wrong last year?" Said the president of the Fed in Chicago.

Charles Evans.

"Or does our assessment of the growth of the economy" have "become more difficult because of business uncertainties" of trade, Mr. Evans said.

Fed officials and private forecasters have said Trump's trade policy makes it difficult. Twice this year, at the beginning of May and after the July 31 rate cut on the Fed, Powell sought to express the view that Fed actions were sufficient to maintain the Fed 's interest rates. US economy is expanding, pushing the appetite of investors for an increased recovery. Both times, Mr. Trump in the space of a few days intensified trade tensions, questioning the economic prospects of the Fed.

Last month, the Fed lowered its quarter-point rates in a range of between 2% and 2.25%, citing the risks of a slowdown in global growth and a slowdown in global growth. unexpected inflation. The next day, August 1, Mr. Trump announced his intention to impose a 10% tariff on $ 300 billion worth of Chinese imports that were not yet subject to a 25% tariff. .

"It has become very difficult day-to-day to predict exactly where the administration is going to be on its policies, or what the next tweet is going to be," he said.

Nathan Sheets,

chief economist at PGIM Fixed Income. Previously, he had held senior positions at the Fed and the Treasury Department under the Obama administration.

Economic forecasts always have a margin of error, he said, "but it's a qualitatively different task, a task for which the Fed is not trained to cope."

Weak economic data on Germany and China last week triggered a liquidation of the stock market and a bond market rally, with 30-year Treasury yields reaching their lowest level so far. This reaction has highlighted the increasing sensitivity of investors to concerns over trade tensions and global growth.

To complicate matters, Mr. Powell must forge a consensus. The group of central bank decision-makers was more divided last month about its desire to cut rates than at any other time during its 18-month mandate.

According to interviews and public statements, half of the 12 regional federal bank presidents expressed reluctance to lower rates before the July 30-31 meeting, mainly because they felt the US economy did not need such a boom. At the same time, the meeting was not in favor of a rate cut of more than a quarter point.

President of the Boston Fed

Eric Rosengren,

who disagreed with the rate decision last month, said that a divergence of views within the Fed was natural given the uncertainty surrounding trade.

"If I assume that trade policy is not changing and that somebody else is assuming a trade war that reduces business and consumer confidence, even if the data is the same, we will have a very strong forecast. different, "he said in an interview. the meeting of 30 and 31 July.

Mr Powell mentioned trade policy in his public remarks, but avoided any judgment on Mr Trump's decisions. "We do not criticize trade policy in any way," he said at his press conference on July 31. "It's really not our job."

Many of Powell's colleagues will be at the Jackson Hole conference this week, where he and his senior lieutenants are expected to begin building consensus ahead of the September 17-18 Fed meeting.

In the absence of a crisis, Fed officials tend to be cautious in their broad policies, creating a culture that challenges Mr. Trump's patience.

"The president has a very difficult job. It's not just about looking at the data …. The committee must also be in the right position in a consensual manner, "said Evans, president of the Chicago Fed, who backed last month's rate cut. "It works best when we are all together about it, as long as we do not delay too much."

Mr. Powell and his Senior Lieutenants, Vice President

Richard Clarida

and the president of the Fed in New York

John Williams,

have led the Fed to cut rates before economic data show conclusive evidence of a slowdown.

Fed leaders have cited research that says that when managers have little leeway to lower their interest rates because they are already close to zero, they should use the limited ammunition they have available early and quickly. They were not more aggressive after the meeting last month because they did not have enough evidence of a slowdown to signal the alarm. They also faced resistance from their colleagues.

Several regional bank officials worried that this would prematurely stimulate an economy that continued to see stable hirings and consumer spending could fuel financial bubbles and other problems.

In order to seek an agreement, Mr. Powell blocked more than one day of his schedule to meet or talk to the 12 reserve presidents and the four governors of the Fed by phone before each meeting of the federal rate-setting committee.

During the discussions, Mr. Powell is not in "sales mode", said the chairman of the Richmond Fed,

Thomas Barkin

"He's really in listening mode."

Mr. Barkin worked for 30 years at McKinsey & Co., the management consulting firm, where he held management positions, including CFO.

"I do not think most business leaders would really like his job – or maybe even do it the same way," Barkin said. "The group must respect the fact that you understand the debate, the challenges – that you have the quality to think that it is ready to follow."

Mr. Powell's job security has become a common topic of conversation on trading desks. Mr Trump has claimed the power to replace the Fed Chairman if he so wishes, a matter of law that raises a dispute between Fed officials.

The president appointed Mr. Powell to his position in November 2017 and he selected four of the current five Fed governors. Trump's frustration with these officials this spring led him to announce his intention to appoint more loyalist supporters and central bank critics to the Fed board.

Two choices of the president,

Stephen Moore

and

Herman Cain,

withdrew from the list after Republican senators said they would probably not win the confirmation. Mr. Trump has since said that he will name two others.

Mr. Powell, a 66-year-old lawyer and former director of private equity firms who worked in the Treasury Department under the President

George H. W. Buisson,

met privately with members of Congress to strengthen their support.

The Fed chief said he would not allow decisions to be influenced by anything other than economic analysis and the mission of central banks to boost employment and maintain stable prices.

"We are human. We will make mistakes, "he told a New York audience this summer. "But we will not make any mistake of integrity or character",

Mr. Trump responded the next day. "He's trying to prove his toughness because he will not let himself go," Trump told Fox Business. "Here's a guy, nobody had ever heard of him before, and now I've done it, and he wants to show that he's tough."

Last month, Powell said he would not leave the Fed if Trump was seeking to end his four-year term, suggesting a possible legal battle.

Any legal battle over executive authority over the Fed chairman could take weeks or months, but the negative reaction of the market would probably be quick, said the former Fed governor.

Sarah Bloom Raskin,

now at the law faculty of Duke University

Rep. Maxine Waters

(D., California), chair of the House Financial Services Committee, asked Mr. Powell when he was going to pack his bags and leave if he was ordered by Mr. Trump. "Of course, I would not do that," Powell replied. "My answer would be no."

Write to Nick Timiraos at [email protected]