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Brave new world: Fed struggling to adjust to uncertain times

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By Agence France-Presse

Federal Reserve Chairman Jerome Powell was lambasted from many sides after he struggled on Wednesday to explain the first interest rate cut in more than a decade, which fueled doubts about the central bank’s credibility.

But the Fed is facing an unprecedented combination of factors buffeting the economy, mostly caused by President Donald Trump and his aggressive trade policy.

US Federal Reserve Chairman Jerome Powell is struggling to defend the central bank's credibility (AFP Photo/ANDREW CABALLERO-REYNOLDS / MANILA BULLETIN)

US Federal Reserve Chairman Jerome Powell is struggling to defend the central bank’s credibility (AFP Photo/ANDREW CABALLERO-REYNOLDS / MANILA BULLETIN)

It has few tools at its disposal to help keep the economy on an even keel, and one — the institution’s credibility — has been undercut daily by Trump’s relentless attacks.

“As usual, Powell let us down,” Trump tweeted not three hours after Wednesday’s decision. “We are winning anyway but I am certainly not getting much help from the Federal Reserve!”

And Trump followed that Thursday with new punitive tariffs on an additional $300 billion in Chinese goods, starting September 1, escalating the year-long trade war that has sapped strength from the world economy.

While the US is growing, the job market is strong and consumer spending healthy, with no sign of inflation, business investment has declined, and China and Europe are slowing while Brexit looms on the horizon.

In that environment, Fed watchers and former Fed officials defended Powell’s performance given the challenges he faces.

Monetary policy “has had to bear the burden of stabilizing the economy so many times” in ways that are “beyond their ability,” Diane Swonk, chief economist at Grant Thornton, told AFP.

Powell in his press conference was trying to shore up confidence but that is difficult for the central bank since it is “now contingent on the president’s Twitter feed and trade,” she said.

Powell called the trade situation “disruptive” and said the rate cut was “intended to insure against downside risks from weak global growth and trade policy uncertainty.”

But he acknowledged that the Fed is facing an unknown:

“There isn’t a lot of experience in responding to global trade tensions. So it is something that we haven’t faced before and that we’re learning by doing.”

Not a resounding note of confidence, especially when at least two Fed officials opposed the decision to cut the key lending rate.

Nothing the Fed can do

Richard Fisher, former president of the Dallas Federal Reserve Bank as well as a former senior trade official, placed the blame squarely with Trump’s trade policy.

“There’s no way monetary policy can offset the concerns these trade initiatives have raised in the business community,” he said on CNBC.

Market players blamed Powell for roiling markets during his press conference by first saying the rate cut was not the first of many, and then saying it might not be the only one either

But the fact is, given the changing dynamics, “they are not sure where rates will go next,” Swonk said.

“They’re trying to make a judgment call and when you get judgment involved you’re going to have a lot more nuance to it, and I think that’s very hard to communicate.”

Powell is the first Fed chief to hold a press conference after every meeting — and the added transparency is not always helpful, she said.

The challenge now for Powell and his fellow policymakers is to convince markets they are making decisions for the right reasons, not because of pressure from Trump or financial markets in search of easy credit.

“He seemed uncomfortable, not confident,” said David Wessel of the Brooking Institution.

“The Fed is trying very hard to say ‘we’re going to do what we think is right no matter what the president says.'” he told AFP.

“But when president is demanding rates cuts and they cut rates while the economy is still in good shape, people are inevitably going to say, ‘we don’t believe you, you cut it because the president made you do it.’ So it’s a difficult situation.”

Swonk cautioned that Trump is undermining institutions and it is not clear if the Fed can defend its position.

“I’m always concerned about Fed credibility,” she said — although the fact that two officials opposed the rate cut is a good sign.

 

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