By Nick Timiraos
Jerome Powell is entering the most perilous stage yet of his
tenure as Federal Reserve chairman, fighting to keep the U.S. from
recession while taking the blame from President Trump for skittish
markets and a slowing economy.
Mr. Trump's unyielding criticism of the Fed has led people
inside the central bank to feel like they are fighting to both buoy
the U.S. economy and preserve the Fed's independence from political
interference.
After cutting short-term interest rates in July, Mr. Powell is
navigating the Fed toward more rate reductions, though conditions
could change. The debate among his Fed colleagues is how much to
move rates and when, as well as how to best frame the decision,
which will be scrutinized by markets and the White House.
Mr. Powell is scheduled to speak Friday at the annual central
bank conference in Jackson Hole, Wyo., a gathering that many hope
will surface clues to the Fed's next move.
Mr. Trump says the economy is slowing because the central bank
pushed interest rates too high last year, while many in business
and at the Fed say president's own trade policies have triggered
market jitters and slowed business investment.
Some analysts said Mr. Powell has at times confused markets over
the Fed's plans. His push to raise interest rates in December, and
his defense of further increases, added to year-end market
volatility. In hindsight, these analysts said, it was a mistake.
Mr. Powell led his colleagues to reverse course within weeks.
The stakes are high all around. Wall Street forecasters have
raised their odds of a recession, and the state of the economy in
2020 will influence Mr. Trump's reelection effort.
"I think our economy is very, very good," Mr. Trump said Sunday.
"If it slowed down, it is because I have to take on China and some
other countries."
The president ripped Mr. Powell as "clueless" after markets
dropped last week, the latest in a string of disparaging remarks
from Mr. Trump since appointing Mr. Powell to lead the Fed. Mr.
Trump has lauded economic systems, such as in China, where central
banks are under tight control, a view that has raised worries among
current and former Fed officials.
"He's made clear in various interviews and tweets that he
doesn't believe that the Fed should be independent," former Fed
Chairwoman Janet Yellen said of Mr. Trump last week during an
interview on Fox Business Network's "WSJ at Large" program.
The president's attacks "for any Fed chair would be a reason to
feel stress," Ms. Yellen said. "But you know I admire what Chair
Powell has been doing. I think that he has tried to tune it
out."
Fed officials see their independence as critical to markets and
the economy. Significant problems, including double-digit inflation
in the 1970s, sprang form political pressure on the Fed to keep
interest rates too low, officials said.
The central bank raised rates four times last year because the
unemployment rate was falling, and inflation reached the Fed's 2%
target. Officials broadly supported the decision because they
expected inflation to continue rising this year. The Fed shelved
plans to keep raising rates after inflation unexpectedly softened
and market volatility soared at the end of 2018.
This year, uneven economic developments have "called all of us
to look and wonder...did we just get it wrong last year?" said
Chicago Fed President Charles Evans.
"Or is it that our assessment of how the economy" would grow has
become "more challenged by some of the uncertainties businesses are
facing" from trade, Mr. Evans said.
Fed officials and private forecasters say Mr. Trump's trade
policy is complicating their task. Twice this year, in early May
and after the Fed cut rates on July 31, Mr. Powell sought to
express the view that Fed actions were enough to keep the U.S.
economy expanding, a pushback against investor appetite for more
stimulus. Both times, Mr. Trump within days intensified trade
tensions, throwing the Fed's economic outlook into doubt.
Last month, the Fed cut rates by a quarter percentage point to a
range between 2% and 2.25%, citing risks from slower global growth
and unexpectedly soft inflation. The next day, on Aug. 1, Mr. Trump
announced plans to impose 10% tariffs on $300 billion in Chinese
imports that weren't already subject to 25% tariffs, a significant
escalation in the U.S.-China trade dispute that rattled
markets.
"It has become very difficult on a day-to-day basis to predict
exactly where the administration is going to be on its policies, or
what the next tweet is going to be," said Nathan Sheets, chief
economist at PGIM Fixed Income. He previously held senior posts at
the Fed and in the Treasury Department during the Obama
administration.
Economic forecasts always have a margin of error, he said, "but
this is a qualitatively different task, one that the Fed is not
trained to deal with."
Weak economic data from Germany and China last week triggered a
stock-market selloff and a bond-market rally, with yields on
30-year Treasury bonds falling to their lowest levels ever. The
reaction illustrated the growing sensitivity of investors to
worries about trade tensions and global growth.
Complicating matters, Mr. Powell has to forge a consensus. The
central bank's policy-making group was more divided last month over
his push to cut rates than at any other time in his 18-month
tenure.
Half of the group's 12 regional Fed bank presidents expressed
some reluctance to cut rates leading up to the July 30-31 meeting,
largely because they felt the U.S. economy didn't need such a
boost, according to interviews and public statements. At the same
time, there was little support at the meeting for a rate cut larger
than a quarter point.
Boston Fed President Eric Rosengren, who dissented in last
month's rate decision, said a diversity of views at the Fed is
natural given the uncertainty over trade.
"If I assume no change in trade policy, and somebody else
assumes a trade war that reduces both business and consumer
confidence, even though the data has been the same, we'll get a
very different forecast," he said in an interview before the July
30-31 meeting.
Mr. Powell mentions trade policy in public remarks, but he has
avoided any judgments about Mr. Trump's decisions. "We're not in
any way criticizing trade policy," he said at his July 31 news
conference. "That's really not our job."
Many of Mr. Powell's colleagues will be at the Jackson Hole
conference this week, where he and his top lieutenants are expected
to begin forging a consensus ahead of the Fed's Sept. 17-18
meeting.
Absent a crisis, Fed officials tend to make big policy moves
with caution, making for a culture that is testing Mr. Trump's
patience.
"The chair's got a very difficult job. It's not only looking at
the data.... It's also getting the committee to the right position
in a consensus fashion," said Mr. Evans, the Chicago Fed president,
who supported last month's rate cut. "It works better when we're
all together on this, as long as we don't delay too much."
Mr. Powell and his top lieutenants, Vice Chairman Richard
Clarida and New York Fed President John Williams, have led the Fed
to cut rates before economic data showed conclusive evidence of a
slowdown.
The Fed leaders have cited research that said when officials
were faced with little room to lower interest rates because they
are already close to zero, they should use the limited ammunition
they have early and fast. They didn't signal more aggressive action
after last month's meeting because they didn't see enough evidence
of a slowdown to signal alarm. They also ran up against resistance
among their colleagues.
Several regional bank officials feared that prematurely
providing stimulus to an economy that continued to see steady
hiring and consumer spending risked fueling financial bubbles and
other troubles.
To seek agreement, Mr. Powell blocks out more than one day on
his calendar to meet or speak by phone with all 12 reserve bank
presidents and the four Fed governors before every meeting of the
rate-setting Federal Open Market Committee.
During the discussions, Mr. Powell isn't in "sell mode," said
Richmond Fed President Thomas Barkin "He's very much in listen
mode."
Mr. Barkin spent a 30-year career at McKinsey & Co., the
management consulting firm, where he served in a senior roles,
including finance chief.
"I don't think most corporate CEOs would like his job very much
-- or maybe even do his job in the same way," said Mr. Barkin. "The
group has to respect that you understand the debate, the challenges
-- that you've got a quality of thinking that they are willing to
follow."
Mr. Powell's job security has become a regular topic of
conversation on trading desks. Mr. Trump has claimed the authority
to replace the Fed chair if he chooses, a legal question Fed
officials dispute.
The president tapped Mr. Powell for his post in November 2017
and has selected four of the five current Fed governors. Mr.
Trump's frustration with those officials this spring led him to
announce plans to name more partisan loyalists, and central bank
critics, to the Fed's board.
Two of the president's picks, Stephen Moore and Herman Cain,
withdrew from consideration after Senate Republicans indicated they
weren't likely to win confirmation. Mr. Trump has since said he
would nominate two others.
Mr. Powell, a 66-year-old lawyer and former private-equity
executive who served in the Treasury Department under President
George H.W. Bush, has met privately with members of Congress to
build support.
The Fed chief has said he won't allow decisions to be influenced
by anything other than economic analysis and central's banks
mission to boost employment and maintain stable prices.
"We're human. We'll make mistakes," he told a New York audience
in a speech this summer. "But we won't make mistakes of integrity
or character,"
Mr. Trump hit back the next day. "He's trying to prove how tough
he is because he's not going to get pushed around," Mr. Trump said
on Fox Business. "Here's a guy, nobody ever heard of him before,
and now, I made him, and he wants to show tough he is."
Last month, Mr. Powell said he wouldn't leave the Fed if Mr.
Trump sought to terminate his four-year term, foreshadowing a
potential legal fight.
Any court battle about executive authority over the Fed chair
could take weeks or months, but the negative market reaction would
probably be swift, said former Fed governor Sarah Bloom Raskin, now
at the Duke University School of Law
Rep. Maxine Waters (D., Calif.), chairwoman of the House
Financial Services Committee, asked Mr. Powell whether he would
pack up and go if ordered by Mr. Trump. "Of course, I would not do
that," Mr. Powell replied. "My answer would be 'No.'"
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
August 18, 2019 18:25 ET (22:25 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.