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President Trump & Fed Chair Powell: A Powerfully Dysfunctional Relationship

President Donald Trump and his hand-picked Federal Reserve Chair, Jay Powell, have never really seen eye to eye.

Immediately after President Trump tapped Powell to succeed Janet Yellen as Fed chair in February 2018, he started criticizing Powell’s policy of rate hikes to cool off a roaring economy.

More recently, Powell has spent months loudly and repeatedly demanding that the president and his allies in Congress boost fiscal spending and pass a second stimulus package to prop up the ailing U.S. economy.  

Regular Americans have been stuck in the middle of this long-running feud between the two most powerful figures in the world’s most powerful nation.

Round One: Trump Demands Interest Rate Cuts

Fed Chair Powell presided over four rate hikes in his first year leading the Federal Reserve, extending the policy normalization begun by Yellen way back in December 2015. Fed funds closed out 2018 at 2.25% to 2.50%, the highest rate in a decade.

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By early 2019, President Trump had seen enough. Decent economic growth and low unemployment had given the Fed good reasons to raise rates, in a doctrinaire attempt to get ahead of inflation. Trump, meanwhile, was embroiled in a trade rhubarb with China, and he was growing frustrated that Powell’s rate tightening could boost the value of the dollar, making American exports more expensive and less competitive.

“We don’t have that advantage because we have a Fed that doesn’t lower interest rates,” Trump said on CNBC in June 2019. “We have a Fed that raises interest rates the day before a bond issue goes out. So we have to pay more money. You tell me about that thinking, OK?”

Lucky for Trump, the long stretch of GDP gains was already running out of steam by mid 2019, even as unemployment fell further. With economic growth looking soft, Powell caved and cut rates three times in the second half of the year in an attempt to buttress the economy as the China/U.S. trade dispute intensified.

Not that this satisfied the president—Trump wanted even more cuts to help a weakening manufacturing sector, but Powell favored a pause

In retrospect, Trump looked more prescient than many acknowledged at the time. The Fed has two jobs: Maximize employment and keep prices stable, which it has recently redefined as inflation rising above 2%. The Fed raised rates throughout 2018 and in the first half of 2019 because the unemployment rate was extremely low and they believed that inflation was poised to take off.

But inflation never showed up, and the unemployment rate bottomed out at 3.5% pre-pandemic. Core PCE inflation, which strips out volatile food and energy prices, hardly spent any time above 2%.

Powell basically admitted as much when he declared during this year’s digital Jackson Hole Symposium that the Fed will tolerate prices rising moderately above 2%. The specifics of how exactly the Fed would accomplish this feat, and what words like “moderately” meant, remain unclear, much to the vexation of Wall Street. Still, it’s a major policy shift for the Fed—presaged by Trump’s spleaning.

Round Two: Powell Demands More Spending From Trump

This year, Powell and Trump’s roles have reversed—albeit with fewer tweets.

Chair Powell has repeatedly called for a second stimulus package after the weekly $600 in extra federal unemployment assistance dried up at the end of June. The emergency measures passed in March did much, according to recent reports, to keep millions of Americans afloat and alleviate the worst effects of the Covid-19 crisis.

Despite employers laying off millions of employees, many low-income workers actually saw their bank accounts grow thanks to the supplemental unemployment benefits. About two-thirds of jobless Americans earned more from their federal and state unemployment insurance payments than they did from working, according to University of Chicago researchers.

Perhaps as importantly, people could count on a consistent paycheck, at least until the extra federal assistance ran out.

As the book Financial Diaries: How Americans Cope in a World of Uncertainty points out, many low- and working-class Americans endure months when their paychecks are much lower than on average. If their car breaks down during a month when tips at the restaurant are low, for example, they’ll have to take on debt or borrow from a friend or forgo a medical procedure to make ends meet.

While the president’s Treasury Secretary, Steven Mnuchin, has been engaged in stimulus negotiations with House Speaker Nancy Pelosi for months, Trump has delivered highly mixed messages on whether he would support a second stimulus and has done precious little to compel Republicans in the Senate to pass anything.

For the Fed Chair, this is a suboptimal strategy.

“Too little support would lead to a weak recovery, creating unnecessary hardship for households and businesses,” Powell said at the National Association for Business Economics Virtual Annual Meeting in early October. “Over time, household insolvencies and business bankruptcies would rise, harming the productive capacity of the economy, and holding back wage growth.”

In Congressional hearings, Powell told lawmakers repeatedly that the central bank’s arsenal contained only blunt instruments, like interest rate cuts and trillion-dollar bond buying programs to inject money into the economy. Powell put the onus squarely on lawmakers and the White House to deliver the stimulus so many Americans desperately need.

The minutes from the most recent Fed meeting detailed that Fed policymakers believed Democrats and Republicans would come together on another deal sometime after the CAREs act petered out. The absence of such a deal could jeopardize the nascent economic recovery. 

“[M]ost forecasters were assuming that an additional pandemic-related fiscal package would be approved this year, and noted that, absent a new package, growth could decelerate at a faster-than-expected pace in the fourth quarter,” read the FOMC minutes.

Investors and Savers Stuck in the Middle

A rosy relationship between a president and a Fed chair isn’t necessary for Americans to prosper. After all, the unemployment rate was at a historically low 3.5% before the pandemic, and paychecks were growing, especially among low-wage workers. Stocks, meanwhile, were at all-time highs. 

During tough economic times, however, Trump and Powell working at cross purposes undermines your bottom line.

While savers may have enjoyed higher yields on their bank accounts thanks to the 2015-2018 rate hike cycle, Powell’s desire to increase borrowing costs may have limited job gains and economic growth last year as global demand struggled. 

Meanwhile, the Trump administration’s indifference to Powell’s call for more stimulus spending as soon as possible has put millions of Americans at risk of falling through the cracks once their savings from the last stimulus run dry.

If nothing happens until next January, when we will have either a second Trump administration or a Biden White House, many Americans will have suffered through months of uncertainty and income insecurity.

Whenever another relief effort passes—if it passes at all—hopefully the president and the Fed chair can get on the same page and support their core constituency: The American people.

Source: Forbes – Money

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