Trump is making it harder for the Fed to ease

US President Donald Trump has been slamming the Fed quite openly for a number of weeks now. But the latest comments from Trump to the Washington Post — a newspaper he hates, by the way — are extraordinarily blunt.

Here’s the Post on what he said:

In a wide-ranging and sometimes discordant 20-minute interview with The Washington Post, Trump complained at length about Federal Reserve Chair Jerome H. “Jay” Powell, whom he nominated last year. When asked about declines on Wall Street and GM’s announcement that it was laying off 15 percent of its workforce, Trump responded by criticizing higher interest rates and other Fed policies, though he insisted that he is not worried about a recession.

“I’m doing deals, and I’m not being accommodated by the Fed,” Trump said. “They’re making a mistake because I have a gut, and my gut tells me more sometimes than anybody else’s brain can ever tell me.”

He added: “So far, I’m not even a little bit happy with my selection of Jay. Not even a little bit. And I’m not blaming anybody, but I’m just telling you I think that the Fed is way off-base with what they’re doing.”

Trump looking to fault Fed if growth weakens

I think it’s clear to everyone Trump is just playing the blame game just in case the economy turns down. He’s certainly rattled by the GM layoff announcement. And so he needs a fall guy. And that guy is Jay Powell. This paragraph from the Post puts paid to that:

Asked in the interview who should be held responsible — and reminded that one of his predecessors, Harry Truman, famously kept a sign at his desk that read, “The buck stops here” — Trump took no personal responsibility.

The narrative that Trump is trying to construct is one where Obama had it easy because of zero rates but he has it hard because of policy normalization. Yet the economy is still doing well because of his policies. You can see the outline of this in comments highlighted by reporter Karen Tumulty on Twitter

Serious question: Does anybody know what this means? pic.twitter.com/g1dzdRadp7

— Karen Tumulty (@ktumulty) November 28, 2018

The Post transcript:

I’m not playing by the same rules as Obama. Obama had zero interest to worry about; we’re paying interest, a lot of interest. He wasn’t paying down — we’re talking about $50 billion lots of different times, paying down and knocking out liquidity. Well, Obama didn’t do that. And just so you understand, I’m playing a normalization economy, whereas he’s playing a free economy. It’s easy to make money when you’re paying no interest. It’s easy to make money when you’re not doing any pay-downs, so you can’t — and despite that, the numbers we have are phenomenal numbers.

This makes it harder for the Fed

The Fed isn’t just one guy. It’s not like Jay Powell can snap his fingers and get the other voting members of the Fed to do his bidding. He sets the tone, sure. But, the consensus for this rate hike train had been building for some time under Yellen. And it’s not clear to me that a Yellen Fed wouldn’t be doing the same thing as the Powell Fed.

But, let’s be clear, the President’s publicly pressuring the Fed to lower rates has the opposite effect of what’s intended. Trump thinks he can pressure Powell into keeping rates down. He can’t. Not only is Powell not the only one deciding, at the margin, the Fed is also likely to keep rates higher in order to prove it is independent of political meddling.

In a worst case scenario, Trump actually fires Powell. But, what then? I believe the other voting members of the FOMC would be more likely to assert independence by voting to stay the course. Trump’s bellyaching about the Fed is only harming him. It serves no useful purpose. If he thinks it’s a veiled threat, he’s wrong.

In the meantime, notice that long-term rates are falling and the US dollar is rising as the market comes to grips with Fed policy. Powell is to make a speech today that might shed some light on where he thinks this is headed next. And remember, as we look to see how the holiday selling season is shaping up, that better macro data means higher short-term rates.