(Bloomberg Opinion) — Even if you’re not the biggest fan of the Federal Reserve, you have to feel a little sorry for Chair Jerome Powell. As everyone involved in financial markets is acutely aware, he and the central bank have been a favorite target of President Donald Trump’s ire for months now.
And yet, the latest Twitter jab on Friday, ahead of the August jobs report and Powell’s remarks on the economy in Zurich, seemed especially demeaning:
The answer, of course, is that Trump “found” Powell already among the Fed’s board of governors when he was making his pick in late 2017. He won out over other candidates that the president reportedly spoke with about the position, including incumbent Janet Yellen, former Fed Governor Kevin Warsh and former National Economic Council Director Gary Cohn. At the time, Powell was seen as largely following Yellen’s blueprint of steady, gradual interest-rate increases until the fed funds rate returned to a more neutral level. He delivered on that promise through the end of 2018.
The past few months have been notably more difficult. In particular, two voters on the Federal Open Market Committee dissented in July when the central bank cut interest rates for the first time in more than a decade. Powell himself sounded somewhat conflicted during a much-anticipated speech last month in Jackson Hole, Wyoming, where he admitted that the Fed doesn’t really have a playbook for dealing with a prolonged, damaging international trade war.
Powell spoke on Friday in Zurich and largely stuck to script, staying fairly upbeat on the economy overall while being careful not to criticize trade policy. The labor market is in “quite a strong position,” he said, and the jobs report released four hours earlier “is very much consistent with that story.” He added that “the outlook is still a favorable one,” arguing that was due in part to the Fed’s pivot starting at the beginning of this year.
Markets didn’t react too much to that. What was somewhat novel, however, was Powell’s discussion of the inner workings of the FOMC and how he leads the central bank based on his experience:
“To a large extent, it’s a policy of putting together a consensus. My nature is to want to incorporate people’s thinking and develop a consensus. Sometimes it’s me convincing, sometimes it’s me trying to move people into a group. Collective decision making can work, and in our case, I think it has worked well…
Sometimes it’s easy to get unanimity on things when the path is clear. Other times it’s murky out there and there’s a range of views. This is one of those times. Trade policy uncertainty is not something that central banks have a lot of practice in dealing with. We’re trying to look through short-run developments and try to assess what the implications for the outlook in the medium and longer term will be of those developments.
We’re clearly at a time where there are a range of views. I do think that’s a very healthy thing. We will of course reach a decision, I expect we will have a strong support for the decision we make, as we did in July.”
With the Fed now headed into its self-imposed blackout period, it seems doubtful that Powell will form a unified front among FOMC voting members at its Sept. 17-18 meeting.
Boston Fed President Eric Rosengren, one of the voters who sided against lowering interest rates in July, reiterated on Sept. 3 that he sees no need for immediate action if the economic data stay on track: “It is clearly reasonable to make the assessment that risks are elevated. Should those risks become a reality, the appropriate monetary policy would be to ease aggressively. However, to date, these elevated risks have not become reality, at least for the U.S. economy.”
No economic reports since then are likely to have changed his mind. The Labor Department report on Friday showed total nonfarm payrolls climbed by a below-forecast 130,000, but average hourly earnings beat estimates by rising 3.2% from a year earlier, remaining close to the highest level in a decade. It was more of a mixed bag then the unambiguously strong data from Thursday, which flipped Citigroup Inc (NYSE:).’s U.S. Economic Surprise Index to positive for the first time since February and caused two-year Treasury yields to rise as much as 14 basis points, the most since May 2010. In one day, bond traders priced out about one-third of a rate cut for the remainder of the year.
Mere minutes before Rosengren’s comments earlier this week, St. Louis Fed President James Bullard took the exact opposite view, telling Reuters that the central bank should slash interest rates by 50 basis points. The trade war, in his mind, is a “global shock” requiring “aggressive” action. He has the ISM manufacturing index on his side, which fell into contraction in August. Carl Riccadonna, chief U.S. economist for Bloomberg Intelligence, said “fear itself” was evident among businesses because of “economic uncertainty, fomented by market volatility and ongoing trade-war escalation.”
Of course, Powell doesn’t have to win every voter over, as the past two decisions have shown. It’s a foregone conclusion that he’ll meet the two factions in the middle and gradually lower the fed funds rate by another quarter point.
Perhaps that’s the prudent move. But it’s fair to ask what exactly a quarter-point cut to interest rates will truly do for the U.S. economy — a question that Powell has struggled to answer in the past. It won’t suddenly boost inflation. Companies aren’t going to go out and immediately hire more workers. It seems unlikely to sharply weaken the dollar and make U.S. exports more competitive. At best, a rate cut will appease financial markets (though in July, it didn’t even do that). At worst, it invites a more prolonged trade war while inching the Fed ever-closer to the zero bound.
To make matters even more challenging for the Fed, policy makers will give an update this month on their interest-rate projections, known as the “dot plot.” For the first time since June, they’re going to have to estimate just how far they’re willing to drop their benchmark to combat the ramifications of lasting trade disputes. That’s where the dissent within the FOMC ranks could really shine through.