By Greg Ip 

Economists see recessions as complex phenomena with multiple causes. Historians and the public prefer simple narratives. So while a recession remains for now more risk than reality, the fight over the narrative is well under way.

Thus, President Trump's intensifying criticism of the Federal Reserve seems intended not just to get lower interest rates, but to saddle the central bank with the blame if the economy does slide into a recession.

But history and headlines suggest it's a losing battle: for investors and businesses, the Fed is less of a preoccupation than the trade war for which--for better or worse--Mr. Trump has claimed credit.

This doesn't make the Fed blameless. After all, rising interest rates have accompanied every postwar recession. Yet recessions often happen when an economy, already slowing because of tighter monetary policy, is hit by an additional shock. In 1929, it was the stock market crash; in 1973, the Arab oil embargo; in 2001, the collapsing tech bubble and 9/11 terrorist attacks and in 2007 and 2008, the global financial crisis struck. Those are what people remember, not what interest and exchange rates were doing in the background.

In the past year, the trade war has had a comparable grip on the public imagination, not just politically but in markets and board rooms where cold financial calculations prevail. Of the 20 largest percentage declines in the S&P 500 stock index in the past 12 months, trade was the main--or one of the main--causes in six, according to financial news reports. It fell 3.2% on Dec. 4, for example, when hopes of a trade deal between the U.S. and China faded and Mr. Trump declared on Twitter that "I am a tariff man," and it dropped 3% on Aug. 5 when China let the yuan drop in response to new American tariffs. The Fed was cited as a cause in just four cases.

Corporate executives have also been far more preoccupied with trade than monetary policy. Prattle, an investment research firm, analyzed the content of corporate earnings calls since May 1 last year and found trade or tariffs were mentioned 2.6 times as often as the Fed or interest rates.

These analyses obviously simplify matters. They don't prove trade caused the market's or the economy's stumbles, or that the Fed didn't. Setbacks for technology companies and slowing growth in the eurozone and China have also preoccupied investors. And all these interact: global growth may be suffering from the effects of higher U.S. interest rates which squeeze countries that borrow in dollars, and from the trade war, on top of the U.K.'s planned exit from the European Union and China's efforts to reduce debt.

The late economist Rudi Dornbusch once said business expansions don't die of old age, they're murdered by the Fed. Many liberal economists with not a lot of love for Mr. Trump share his conviction that Fed Chairman Jerome Powell has recklessly raised rates out of a misguided obsession with inflation.

This is hard to square with events. Mr. Powell was the most dovish candidate Mr. Trump considered for the job, aside from then-Chairwoman Janet Yellen. This Fed rate increase cycle has been the most gradual in 30 years, except 1999 to 2001, when rates started out much higher, adjusted for inflation.

Many economists, and some of Mr. Powell's colleagues, do think the Fed's last rate increase in December was a mistake--and less sustainable when other central banks are lowering rates. If so, Mr. Powell corrected it quickly, scrapping plans to raise rates further and then, in July, cutting them.

Indeed, the frequency with which the Fed bore the blame in the market narrative receded between 2018 and 2019. The same pattern appears in the bond market. There, long-term bond yields have dropped below short-term rates, a so-called inverted yield curve that has preceded most recessions. Four of the 10 largest one-day drops in the 10-year Treasury yield in the last 12 months were driven by trade news--all in the last four months--for example on May 30 when Mr. Trump threatened Mexico with escalating tariffs over illegal immigration and on Aug. 1 when he announced new tariffs on $300 billion of Chinese imports.

These shocks may finally do what Mr. Trump has been demanding for months, which is persuade the Fed to cut interest rates sharply. While the Fed has no official view on trade wars, it has a pretty strong one on recessions: it will do what it can to prevent one.

Write to Greg Ip at greg.ip@wsj.com

(END) Dow Jones Newswires

August 21, 2019 09:14 ET (13:14 GMT)

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