Trump won’t win against the Fed

President Trump yesterday escalated his attacks on the Chairman of the Federal Reserve Jerome Powell over his reluctance to cut interest rates, prompting a fresh plunge on Wall Street. The President may appear determined to cut his central banker down to size. And yet the reality is that Powell is completely right not to cut rates – and the President won’t be able to fight the Fed forever.

“There can be a SLOWING of the economy unless Mr. Too Late, a major loser, lowers interest rates, NOW,” Trump said on Truth Social, his social media network, yesterday. It was the latest in a series of bitter attacks on Powell for holding rates steady even as there are signs the US is sliding into a recession. Perhaps not very surprisingly, American stocks and the dollar were rattled by the latest outburst by the President, with the S&P500 falling by another 2.4 percent, for a 12 percent fall since the start of the year, and the Nasdaq falling by another 2.5 percent, for an 18 percent fall since January. 

It is not hard to understand why the markets are so nervous. The President appears determined to bring the central bank under his personal control, and will either humiliate Powell so often and so publicly that he bullies him into a resignation, allowing Trump to appoint his own man in his place, or else resorts to attempting to fire him. 

The trouble is, the President can’t fight the Fed forever. The toll it is taking on the financial markets is already punishing. The performance of US stocks under Trump 2.0 for the first 3 months of a presidency are the worst since 1928 according to Bespoke Research (the next worst was the 9 percent drop in the S&P500 in the first three months of Franklin Roosevelt’s third term in 1941 when, in fairness, there was a lot of bad stuff happening in the world).

In reality, Powell can’t cut rates no matter how much President Trump might want him to. The economy is slowing down, but the huge tariffs imposed on everything the US imports, especially from China, are going to start driving up prices very soon, sparking a round of inflation that the central bank will have to keep under control. In fact, rates may have to go up instead of down. It is hardly Powell’s fault that Trump’s economic plans don’t make any sense, and firing him won’t change that. Sooner or later, Trump will have to back down – but until it happens the markets will remain very nervous.