I don’t know what the president expected Jay Powell to do.
The Fed chairman’s remarks at the Jackson Hole Federal Reserve conference on Friday were in line with his comments after July’s Fed meeting, and with the minutes from that meeting. There are increasingly worrying signs in the global economy, he said. Global trade tensions are one factor worsening the outlook. And the Fed stands ready to pursue appropriate policy adjustments to support the economy as needed.
The financial markets took Powell’s statement as mildly dovish. Bond yields fell a little, stocks rose a little, the dollar fell a little — all signs the speech gave market participants a little more confidence the Fed would pursue at least a couple more interest rate cuts. But mostly, the speech seemed to contain what people expected it to contain.
In response, the president attacked Powell on Twitter, asking who’s the bigger enemy: him, or Chinese president Xi Jinping.
That tweet didn’t move financial markets. But the next few tweets did. The president declared he’d be announcing a response to China’s most recent tariff escalation this afternoon, and that he “hereby” instructs U.S. companies to find somewhere other than China to do business. Stocks promptly fell by 500 points.
Obviously, there has often been market turmoil related to the president’s trade policies. But today feels different. For the last couple of years, there had been a pattern: The president escalates, the markets hate it, then the president finds a way to back off, and stocks go back up. For a long time it looked like the president’s China policy was a negative factor for economy, but its effects were manageable, in significant part because Trump faced political incentives to limit the damage.
Now, as the economy shows signs of weakening (in part for reasons unrelated to the president’s actions) he seems panicked. He wants the Fed to clean up his mess but — despite public perception — his public jawboning of the Fed appears to be having little effect on monetary policy. The main way the president has been affecting monetary policy has been by taking concrete policy actions that hurt the economic outlook, which changes the parameters the Fed considers as it decides how to set interest rates. The bigger a mess Trump makes, the more rate cuts he can get, but not enough rate cuts to actually offset the mess. And this is making him angry.
The main lever he has left is his trade policy itself. If he wanted less China-related economic drag, he could back off the tariff threats. And indeed, he did a little of that a couple of weeks ago, delaying some of the new tariffs he announced for September 1 so they won’t take effect until December 15. His administration said this delay was for national security reasons, though he said himself it was because he didn’t want to interfere with the Christmas shopping season.
But the Chinese appear to have read the delay as a sign of weakness. This week they announced more tariffs, infuriating the president. Since backing off didn’t work, he decided to escalate today. And that’s what’s so nerve-racking for the markets: His trade policy no longer appears to be self-limiting. In fact, it could be self-reinforcing, where tariffs cause damage and the president tries to “fix” the damage with more tariffs.
It’s also worth considering the possibility that we have gotten too far down the trade-war road for the president to unwind the problems he’s caused. To the extent there are signs of weakness in the domestic economy, they are largely on the producer side. The consumer sector still looks decent. But tariffs and uncertainty over future tariffs have already discouraged businesses from producing and investing. And China has less reason to participate in a de-escalation than they did a year ago, since they can just ride out the next year and hope to be facing a new, less-hostile president. As Jonathan Chait notes, Xi Jinping doesn’t have to worry about reelection like Trump does.
With a China less willing to back down and a trade war maybe too far along to stop, the president is backed into a corner. He may feel he can’t save the economy by folding. And so he may follow his instinct — one of the few consistent policy views he has expressed for decades — that protectionism is good for the economy, and that despite what the markets and his advisers are telling him, trade wars are good and easy to win and more tariffs and more disruption will only mean more winning for the U.S.
What the president showed us today is he’s prepared to hit the gas as he approaches the cliff. That should make us all worried about the economic outlook — and it should make Republicans very worried about the political outlook.