After the Federal Reserve this week approved another rate hike, President Donald Trump has apparently doubled down on his criticism against Fed Chairman Jerome Powell, telling advisers this week he would like to fire the Fed head — an authority the president does not have — according to one report.
Economists say Trump's assessment of Powell's performance is, at best, a mischaracterization and, at worst, a deflection of the damage Trump’s own worst impulses have inflicted on the market.
"I’m not happy with the Fed. So far, I’m not even a little bit happy with my selection of Jay,” Trump told the Washington Post in an interview last month. “I think the Fed is a much bigger problem than China.”
In reality, the Federal Reserve's relationship with the stock market is more nuanced than this criticism would indicate, and economists say Trump’s complaints about Powell represent a flawed understanding of how the economy works.
“They’re not targeting financial markets and specific companies when they’re making decisions,” said Lindsey Piegza, chief economist and managing director at Stifel Fixed Income.
While Trump characterized the Fed as a “bigger problem” than China, economists say the president’s own unpredictable and sometimes bellicose approach to America's trading partners is one of the worries that has sent investors fleeing in recent weeks.
“There’s definitely a lot of angst in the market around trade and tariffs — companies needing to alter their sourcing alter their supply lines, alter who and how they sell products across countries — the uncertainty of that is definitely weighing on the markets,” said Brian Rehling, co-head of global fixed income strategy at the Wells Fargo Investment Institute. “That probably continues to be one of the bigger factors driving markets lower the last couple of months.”
Economists also said Trump overlooked a second key driver of higher interest rates: Bigger deficits. “The tax cuts late last year have sharply increased the federal deficit and that means the Treasury prints more debt,” said Karen Shaw Petrou, managing partner of consulting firm Federal Financial Analytics.
“Money moves out of the stock market into the bond market when Treasury prices go up, and the deficit is driving prices up,” she said.
Trump harping on Powell paints a flawed picture of what the Fed really does, economists say. “Specifically, the Fed is tasked with two mandates. One is full employment and the other is keeping inflation contained. Explicitly, that’s all they’re focused on,” Rehling said.
Of course, given the significant role consumer spending plays in the U.S. economy, successfully executing these two mandates plays a big role in the rate of economic growth. The benchmark Dow Jones Industrial Average tanked on Wednesday as Powell gave a press conference following the Federal Open Market Committee's decision to approve a fourth rate hike this year. His comments prompted broad selling on Wall Street because investors worried rates would go up faster than expected in 2019.
“The stock market is overly focused on the Fed,” Petrou said.
Some economists say this fixation is the result of nearly a decade’s worth of post-recession accommodative policy defined by low interest rates and increased liquidity. “The Federal Reserve in this business cycle has had a disproportionate effect on asset prices certainly, including equities,” said Joseph LaVorgna, managing director and chief economist of the Americas at Natixis.
“The extraordinary policies the Fed engineered to get the economy out of the crisis were designed specifically to lift asset prices, so this bout of volatility this year and the recent pullback is predominantly a Fed story,” LaVorgna said, but he suggested that blaming Powell was misguided.
“Powell did inherit it, and to his credit, I thought he gave an excellent speech anyway and I think he did the right thing,” LaVorgna said.
In his criticism of Powell, Trump said, “I’m not being accommodated by the Fed,” comparing the central bank unfavorably to its overseas counterparts. “China is being accommodative. The euro and Europe is being accommodative. We’re not getting any accommodation,” he said.
But this characterization leaves out some key context. “Yields overseas are even lower,” LaVorgna pointed out.
“The U.S. central bank was among the first to remove accommodative policy… but what he’s failing to include is the motivation behind that differential. The U.S. economy, while still modest, is on relatively stronger footing. I don’t know if we want to point to Europe and the model for European central bank initiatives,” Piegza said, adding that European monetary policymakers will have less ammunition to combat a future recession the longer it continues to hold down rates. In fact, Trump trade adviser Peter Navarro criticized the European Central Bank’s accommodative policy stance last year, saying that Germany was taking advantage of a weak Euro. And in 2016, Trump accused Powell’s predecessor, Janet Yellen, of keeping interest rates artificially low at then-President Obama’s bidding.
“Policymakers are broadly looking overall. They’re not targeting financial markets and specific companies when they’re making decisions,” Piegza said. “Politicians maybe have a shorter, more narrow focus.”
“The president wants to run the economy hot,” said Dan North, chief economist at Euler Hermes North America. “That’s why it’s important for the Fed to retain its independence from the president and from Congress.”
Central bankers have to be concerned about a longer time horizon, North said. “Easy money for too long always ended up in a disaster. The Fed is aware of this, but if you’re going to be out of office in a few years, you don’t have to clean up that mess. The Fed does.”