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Markets register a shock, but is Trump right to blame the Fed?

EconomyAug 14, 2019 04:35PM ET
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© Reuters. The Federal Reserve Board building on Constitution Avenue is pictured in Washington

By Howard Schneider

WASHINGTON (Reuters) - It takes a lot to kill an economic expansion, typically requiring a major shock to bring growth to a halt and trigger a U.S. recession.

This week investors signaled that moment may have arrived, and one big question is whether that shock has come from President Donald Trump's trade war or a mistake by policymakers at the U.S. Federal Reserve.

As bond markets flashed concern about recession on Wednesday and major stock indices cratered, Trump put the blame squarely on the Fed for continuing to raise rates through the end of last year. Even Trump foe and New York Times economics columnist Paul Krugman dinged the Fed for "a clear mistake."

In raising interest rates four times last year "the Federal Reserve acted far too quickly, and now is very, very late," in reversing itself and cutting borrowing costs only modestly so far, Trump tweeted. "Too bad, so much to gain on the upside!"

Earlier on Wednesday, White House trade adviser Peter Navarro told Fox Business Network the U.S. central bank should cut rates by half a percentage point "as soon as possible," an action he claimed would lead "to 30,000 on the Dow."

A cut of that magnitude would typically be associated with serious economic risk, not an economy with record low unemployment and ongoing growth.

As it stood, major U.S. stock indices slumped by around 3% by Wednesday's close with the blue chip Dow Jones Industrial Average (DJI) suffering its largest percentage loss of the year. Bond investors pushed the yield on the 30-year Treasury bond to a record low.

Causing even more concern: The yield on the 2-year Treasury note briefly went above the yield on the 10-year Treasury note, the sort of "inversion" that, when it proves durable, has preceded prior U.S. recessions.

Trump himself took note of the development, blasting the Fed chair he appointed - Jerome Powell - as "clueless" in a tweet citing the "CRAZY INVERTED YIELD CURVE."

FROM AS GOOD AS IT GETS TO GLOOMY

It was perhaps the most dramatic bit of evidence yet of just how the landscape for the Fed has changed over the past few months, from one that Powell deemed "remarkably positive" as of last October, to one of rising risks for the United States' record-setting, decade-long expansion.

As of last fall, the Fed thought the economy, fueled by the Trump administration's massive $1.5 trillion tax cut package and spending plans, would grow strongly enough to justify steadily higher rates.

At that point the threat of a recession seemed distant unless some sort of outside event intervened to throw the economy off course - something like the collapse of the dot-com stock market bubble ahead of the brief 2001 recession, or the implosion of the U.S. housing and credit markets ahead of the more serious 2007-2009 Great Recession.

Yet, as Trump's trade rhetoric and his imposition of tariffs on trading partners ratcheted up this year, particularly since May, investors have acted as if a breaking point had been reached.

Global trade flows have dropped. Economic growth in Germany, a bellwether economy of sorts given its reliance on exports, contracted in the second quarter. Data also showed industrial output in China fell to more than a 17-year-low in July. Indices of uncertainty also have spiked.

If Fed policy suddenly seemed out of step, it was perhaps inevitable given the difficulty of keeping up with Trump's whipsaw approach to trade policy, and the growing sense that the fallout may be deeper and longer lasting than expected.

"The challenge is that Trump's trade policy has proven so erratic that you cannot relieve the sense of uncertainty," as firms adjust to what may be a years-long rearrangement of global supply chains and cost structures, said Tim Duy, an economics professor at the University of Oregon. "So the question becomes is policy going to be easing enough ... or remain so tight that the economy remains vulnerable?"

Investors in federal funds futures contracts are currently pricing in a quarter-point rate cut at each of the Fed's remaining three policy meetings in 2019. That would take the benchmark fed funds rate to a range of between 1.25% and 1.50%.

Along with the rate cut at the last Fed meeting in July, it would also mean the U.S. central bank will have used up almost half the rate-cut "ammunition" assembled during a slow-moving, and ultimately truncated series of rate increases begun in 2015.

For Trump, who is hoping to make the economy a central part of his case for his 2020 re-election campaign, further rate cuts could not come fast enough. He has been berating the Fed for its rate increases for more than a year - since even before his trade rift with China morphed from being considered an economic annoyance to a larger and potentially durable risk.

AHEAD OF CURVE?

Compared to the prior two recessions, the Fed may actually be ahead of the curve.

In both the 2001 and 2007 downturns, the Fed raised rates even after the yield curve inverted and did not cut until just a few months before the start of recession about a year later.

In the current case, it signaled a policy shift in January, when it removed the expectation of further rate hikes from the table, and then cut rates two weeks before Wednesday's yield curve inversion.

Whether that proves adequate is another matter.

In an interview scheduled to air on Fox Business Network on Friday, former Fed chief Janet Yellen said she felt the U.S. economy remained "strong enough" to avoid a downturn, but "the odds have clearly risen and they are higher than I'm frankly comfortable with."

Markets register a shock, but is Trump right to blame the Fed?
 

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Comments (9)
Lloyd McCord
Lloyd McCord Aug 14, 2019 6:58PM ET
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Obama, Bush & Clinton sold America down the river. They kicked the can on Chinese trade practices, manufacturing loss, and the elimination of the our middle class so they and their over paid corporatist buddies could get filthy rich. If President Trump hadn't said ENOUGH!, when would be the best time to stand up for America's middle class? Is there really a better time than now to let the world know that we will no longer be royally screwed for the benefit of kleptocratic CEOs and autocratic dictators? Grow a pair and locate your spines! You all put your juvenile hatred and money grubbing fears above your grandchildren's future. Disgusting, selfish and spineless. Congrats!
Jan Buyle
Jan Buyle Aug 14, 2019 6:21PM ET
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The only one to blame is Donald Bancruptspecialist Trump... a completely incompetent narcist... a recession will NOT make America great again!
Chris Sundo
Chris Sundo Aug 14, 2019 6:21PM ET
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you nailed it on the head Jan!  Donald is a bankruptcy specialist. ---- His deviancy and nefarious ways to make himself bigger at someone else's cost, and his multiple personality disorders (Ego-maniac, ASPD - Anti Social Personality Disorder __ he ain't care about people, but only for boasting about his manipulated reality, narcissism, and incapable of controlling his urge to tweet) -- those all cause our carefully balanced democracy to crumble .. rather sooner than later. South Korea's economy experienced 2 quarters of sequential declines in May 2019, Germany has been in recession, Americans will have higher costs of import, All for what? So the Donald can find himself through bad experience. ---- His whole presidency has been all about Donald vs Donald. His wife gave up on him long ago. His kids learned from daddy, to stuff their pockets while the party is ongoing. It's the non-1% who get it on the chin when Trumpish folks reject history's lessons. Every1 nos tarrifs ain't pay off.
Jerry Gregor
Jerry Gregor Aug 14, 2019 5:20PM ET
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Thanks to obstructionist Moscow Mitch
Karin KH
Karin KH Aug 14, 2019 5:14PM ET
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Incapable person is always blame someone else, except himself...typical loser:) :) :)
Holly Sorensen
Holly Sorensen Aug 14, 2019 4:14PM ET
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bankruptcy is his specialty
Tom OKray
Tom OKray Aug 14, 2019 3:32PM ET
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Trump is a narcicist so nothing is his fault, classic symptom. He thinks the world revolves around him, another classic symptom. Don't understand while people blindly follow this guy, think he walks on water, vote him out in 2020, impeachment is to good for him needs to lose election.
Antonio Velardo
Antonio Velardo Aug 14, 2019 2:48PM ET
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This is ridiculous. And he keeps throwing gasoline on the fire.
Diet Market
MarketLeader Aug 14, 2019 2:28PM ET
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Created the Trade war globally and now the end result is recession warning all over the world, then goes on to shamelessly blame the Fed for the problem and crisis he created in the first place.
Al Vlaj
alvlaj Aug 14, 2019 12:45PM ET
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This loser is 100% responsible if we go into a recession and of course has to blame everyone but himself.  He's no Republican.  The GOP use to be for fiscal responsibility, free trade and human rights with decent values.  The Senate's silence is becoming deafening and the Party is going to get voted out altogether in the next election if we are not careful.  Not only the worst President in history, but with weakest Senate in my lifetime.  Things in the GOP need to go back to the way they were.
Andrew carson
Andrew carson Aug 14, 2019 12:45PM ET
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Back the way they were like the lost years of Obama?!
Don Getty
Don Getty Aug 14, 2019 12:45PM ET
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Andrew carson  lets see Obama came to power on the tail of G Bush who had destroyed the american economy, -  Obama righted the ship and made progress the first two years of Dictator Donald's presidency show strong economic progress which is always from the predecessor's policies, But Dictator Donald was going to make better deal's right he mowed through everything in site and lo and behold your headed for a recession that the next Dem in 2020 will have to clean up like usual!
Steven Chen
Gamer_LG Aug 14, 2019 12:45PM ET
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pretty much spot on. last 2 gop has been a streak, bush left US with recession and Iraq war. Trump is leaving with recession and trade war... having republican as president is probably the new indicator for recession instead of inverting yield. lol
Jerry Gregor
Jerry Gregor Aug 14, 2019 12:45PM ET
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Andrew carson Yes, thanks to obstructionist Moscow Mitch
 
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