Powell plants a roadblock on Trump’s Twitter road to zero rates
Donald Trump’s spat with the Federal Reserve may have taken on a new dimension, with his evolving call for zero or negative interest rates finally meeting some resistance from Jay Powell, the central bank’s chairman.During the press conference following the Fed’s decision on Wednesday to ease monetary policy, Jay Powell, the central bank’s chairman, effectively pushed back on the idea of cutting the benchmark borrowing rate to zero or further.He said the Fed was comfortable using “moderate adjustments” to the federal funds rate to support the economy at present, but was prepared to be “more aggressive” if conditions weakened. Should the central bank reach the zero lower bound — as it did in 2008 — he did not think it would use negative interest rates, and would instead revisit large-scale asset purchases, known as quantitative easing, and aggressive forward guidance.That represented a response, however tacitly, to Mr Trump’s evolving social media warpath this year against the Fed, which initially began as displeasure with rates being high. The president’s call for zero or negative interest rates has been honed in the wake of the Fed cutting the benchmark borrowing rate in July for the first time since the financial crisis and against the backdrop of policy-easing measures from other global central banks that keep borrowing costs there low relative to the US.Mr Trump’s criticism of “quantitative tightening” — the process of the Fed mopping up post-financial crisis liquidity — is perhaps worthy of additional debate this week following a cash squeeze in the short-term borrowing market.How did we end up here?In the lead-up to the central bank’s July policy meeting, Mr Trump used a series of tweets to describe the Fed as having a “faulty thought process” and its “antiquated” policy on interest rates and tightening as being an “anchor wrapped around our neck”.He has long maintained there is no inflation in the US. The most recent consumer price index data showed core inflation, which strips out volatile energy and food items, rose at an annual pace of 2.4 per cent in August, its highest in more than a year.On July 31 the Fed cut interest rates by 25 basis points to a range of 2 per cent to 2.25 per cent. Jay Powell, Fed chairman, followed this up with a press conference saying this was a mid-cycle adjustment and not the “beginning of a lengthy cutting cycle”, leaving the market confused about the outlook for policy.Mr Trump pounced on the chairman’s comments, tweeting: “What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world.”Mr Powell pushed back in his own way, using the annual central bank powwow at Jackson Hole, Wyoming, to say fitting trade uncertainty into the Fed’s policy framework was a “new challenge” and emphasise it had little ability to influence international trade negotiations.On August 7, Mr Trump took to Twitter after “Three more Central Banks cut rates” and said the US’s problem “is not China” but rather the Federal Reserve, which he said “must Cut Rates bigger and faster, and stop their ridiculous quantitative tightening NOW.”A month ago, Mr Trump became more specific in his demands. He bemoaned the “horrendous lack of vision by Jay Powell and the Fed” and Democrats selfishly trying to “‘will’ the Economy to be bad for the purposes of the 2020 Election”. “The Fed Rate, over a fairly short period of time, should be reduced by at least 100 basis points, with perhaps some quantitative easing as well”, he tweeted, adding this would be a positive outcome for the US and global economy.Late last month, Mr Trump began pointing to the likes of Germany, where bonds were being sold at negative yields, and other countries where borrowing costs were lower than those of the US.This came to a head last week when Mr Trump said: “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt.”He continued: “The USA should always be paying the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of “Boneheads.”The prospect of zero rates, or lower, now seems like even a far cry from Mr Trump’s warning, before the central bank’s July meeting, that it is “far more costly for the Federal Reserve to cut deeper if the economy actually does, in the future, turn down!” and that it would be “Very inexpensive, in fact productive, to move now.”How times change.