Sorry, investors, but there is no sanity clause.
Two years ago, after the shock of Donald Trump’s election, financial markets briefly freaked out, then quickly recovered. In effect, they decided that while Trump was manifestly unqualified for the job, temperamentally and intellectually, it wouldn’t matter. He might talk the populist talk, but he’d walk the plutocratic walk. He might be erratic and uninformed, but wiser heads would keep him from doing anything too stupid.
In other words, investors convinced themselves that they had a deal: Trump might sound off, but he wouldn’t really get to make policy. And, hey, taxes on corporations and the wealthy would go down.
But now, just in time for Christmas, people are realizing that there was no such deal — or at any rate, that there wasn’t a sanity clause. (Sorry, couldn’t help myself.) Put an unstable, ignorant, belligerent man in the Oval Office, and he will eventually do crazy things.
To be clear, voters have been aware for some time that government by a bad man is bad government. That’s why Democrats won a historically spectacular majority of the popular vote in the midterms. Even the wealthy, who have been the prime beneficiaries of Trump policies, are unhappy: A CNBC survey finds that millionaires, even Republican millionaires, have turned sharply against the tweeter in chief.
.. The reality that presidential unfitness matters for investors seems to have started setting in only about three weeks (and around 4,000 points on the Dow) ago.
- First came the realization that Trump’s much-hyped deal with China existed only in his imagination. Then came
- his televised meltdown in a meeting with Nancy Pelosi and Chuck Schumer,
- his abrupt pullout from Syria,
- his firing of Jim Mattis and
- his shutdown of the government because Congress won’t cater to his edifice complex and build a pointless wall. And now there’s
- buzz that he wants to fire Jerome Powell, the chairman of the Federal Reserve.
Oh, and along the way we learned that Trump has been engaging in raw obstruction of justice, pressuring his acting attorney general (who is himself a piece of work) over the Mueller investigation as the tally of convictions, confessions and forced resignations mounts.
.. And even trade war might not do that much harm, as long as it’s focused mainly on China, which is only one piece of U.S. trade. The really big economic risk was that Trump might break up Nafta, the North American trade agreement: U.S. manufacturing is so deeply integrated with production in Canada and Mexico that this would have been highly disruptive. But he settled for changing the agreement’s name while leaving its structure basically intact, and the remaining risks don’t seem that large.
.. Now imagine how this administration team might cope with a real economic setback, whatever its source. Would Trump look for solutions or refuse to accept responsibility and focus mainly on blaming other people? Would his Treasury secretary and chief economic advisers coolly analyze the problem and formulate a course of action, or would they respond with a combination of sycophancy to the boss and denials that anything was wrong? What do you think?
As the stock market churned this week, President Trump anxiously called advisers both inside and outside the White House looking for validation that his talks with China were not driving the sell-off.
Trump has questioned why the markets weren’t reacting more positively to the news of his potential breakthrough with Beijing. In consulting with advisers, he remained convinced that the volatility wasn’t his own doing, but rather, the product of the Federal Reserve’s plan to raise the benchmark interest rate.
.. But investors—and many within his administration—saw it differently. Almost as soon as Mr. Trump declared himself “Tariff Man” on Twitter on Tuesday, indicating that he would be willing to slap additional tariffs on China if it doesn’t deliver on key promises, stock prices tumbled. Those concerns intensified Thursdayfollowing the arrest of a senior executive of networking-gear making Huawei Technologies Co., sending stocks plummeting for the greater part of the day.
Publicly, Mr. Trump has often dismissed market fluctuations as part of a natural correction, but several people close to the president say he places as much importance on the health of the Dow Jones Industrial Average for validation of his job performance as he does with his polling numbers.
.. He would get excited about triple-digit gains in a single day and question aides about how certain actions might influence the market, people familiar with the matter said. Asked about Mr. Trump’s attention to the stock market, one person close to the White House said: “He’s glued to it.”.. Late last year, as stocks climbed to records, Mr. Trump repeatedly drew parallels between his administration’s economic policies and the market value of American companies, tweeting more than a dozen times about market performance in November and December 2017 alone... “It doesn’t seem like anything was actually agreed to at the dinner [at the G-20 in Buenos Aires] and White House officials are contorting themselves into pretzels to reconcile Trump’s tweets (which seem if not completely fabricated then grossly exaggerated) with reality,”JP Morgan wrote.. While he has been quick to claim credit for market rallies, Mr. Trump has repeatedly pointed elsewhere when stocks slide. His favorite target: Fed Chairman Jerome Powell, who Mr. Trump has slammed over his decision to raise the interest rate... Mr. Trump also said that the October sell-off was reaction to potential election wins by the Democratic party.. Treasury Secretary Steven Mnuchin, speaking at The Wall Street Journal CEO Council in Washington on Tuesday, acknowledged that “the (stock) market is now in a wait and see” moment with regard to China: “Is there going to be a real deal at the end of 90 days or not?”
President Trump, do yourself a favor. Stop attacking the Federal Reserve and its chairman, Jerome H. Powell (yes, the same Powell you nominated). The result would be better for you, better for Powell and — most important — better for the country.
Unfortunately, Trump can’t seem to restrain himself.
“I will tell you, at this moment in time I am not at all happy with the Fed. . . . They’re making a mistake because . . . my gut tells me more sometimes than anyone else’s brain can ever tell me. . . . I’m not even a little bit happy with my selection of Jay. Not even a little bit.”
.. Until recently, there seemed to be a crude consensus among economists that the Fed should continue its gradual increases in interest rates to preempt higher inflation. The economy seems strong enough to tolerate tighter credit.
But the consensus may be fraying. There are signs of weakness.
- The stock market has fallen;
- housing sales and prices have softened;
- the trade war between the United States and China remains unresolved
.. On Nov. 26, the paper ran an op-ed by
- Harvard economist Martin Feldstein, a chairman of the Council of Economic Advisers under President Ronald Reagan, urging the Fed to raise rates. The next day, the Journal ran an op-ed by
- Harvard economist Jason Furman, chairman of the CEA under President Barack Obama, counseling delay.
.. One danger for Trump is that the Fed, seeking to prove its “independence,” will deliberately oppose what the president prefers.
.. One danger for Trump is that the Fed, seeking to prove its “independence,” will deliberately oppose what the president prefers.
.. “President Trump has gone completely off the rails with his criticism of Fed Chair Powell,” says economist Mark Zandi of Moody’s Analytics. He “is using the Fed as a scapegoat for anything that goes wrong in the stock market and the economy.”
In Trump’s defense, he is not the first president to try to control the Fed and corrupt its independence.
- Lyndon B. Johnson lambasted then-Fed Chairman William McChesney Martin in the mid-1960s for raising interest rates against his wishes.
- Richard M. Nixon pressured Arthur F. Burns, Martin’s successor, to keep rates low. Likewise, President
- Harry S. Truman pushed the Fed to maintain easy money and credit.
.. But these and other cases occurred mainly behind closed doors. Trump’s brash innovation has been to take his complaints public; the apparent aim is to intimidate the Fed into doing his bidding. If the Fed resists, Trump might propose legislation curbing its powers. That would signal a real state of war between Trump and the Fed, with what consequences for financial markets and the economy, it’s hard to know.
.. It’s also true that attacking the Fed has long been standard operating procedure for members of Congress of both parties.
“Congress depends on the Fed both to steer the economy and absorb public blame when the economy falters,” write Binder and Spindel. A lot of this criticism is political theater, designed to impress voters but not to do much else. What’s not familiar is for the president to be leading the charge.
A question running alongside Donald Trump’s political career is whether he will ever pay a price for his verbal insults.
It was widely thought Mr. Trump might have damaged himself fatally when in mid-2015 he said of John McCain’s time as a prisoner of war in Vietnam: “He’s not a war hero. He’s a war hero because he was captured. I like people that weren’t captured.”
Even now, Mr. Trump’s verbal smackdowns come so fast and furious that it’s hard to keep up. As far back as I can remember—about a week or so—objects of Mr. Trump’s ire have included
- the chief justice of the Supreme Court, the
- special counsel who is investigating him, and
- the chairman of the Federal Reserve Board.
- The attacks on “fake news” roll in and out like the weather.
Mr. Trump did the news conference primarily to offer his analysis of the midterm election results, which the president described as “very close to complete victory.”
.. It eventually became clear that what Mr. Trump meant by close to complete victory was the results in races with candidates for whom he personally campaigned—such as Florida, Georgia, Tennessee and Indiana—rather than the election outcome for Republicans more generally.
.. “And Barbara Comstock was another one. I mean, I think she could have won that race, but she didn’t want to have any embrace. For that, I don’t blame her. But she lost. Substantially lost. Peter Roskam didn’t want the embrace. Erik Paulsen didn’t want the embrace.”
This is unprecedented. Politics ain’t beanbag, but no president has ever ridiculed the losing members of his own party. No one in politics mocks a defeated election opponent.
.. This moment could cost Mr. Trump in the next two years. The Republicans Mr. Trump hung out to dry in that news conference have friends in Congress and across Washington, and it’s not likely they are going to forget this.
.. Every U.S. presidency at some point comes under intense political pressure. Some break, like Lyndon Johnson or Richard Nixon. But until then, all could count for their survival on the political and personal loyalty of members of their party or the people who worked for them.
Who with political power that matters will Donald Trump call on when his darkest hour arrives? Many will lift a finger, but how high?
Mr. Trump has proven his resiliency. But that news conference was an odd moment, kicking fallen Republicans while associating himself with the tender mercies of Nancy Pelosi. Washington, he may find, can quickly become a lonely place.
Federal Reserve leaders for the past quarter-century have made decisions about interest rates without being pressured by the president.
President Trump has broken that streak, calling the central bank “crazy” for raising rates and more than once saying the Fed is damaging the economy. That has prompted Fed Chairman Jerome Powell to update playbook rules for dealing with a president annoyed by America’s central bank.
Rule 1: Speak not of Mr. Trump.
Rule 2: When provoked, don’t engage.
Rule 3: Make allies outside the Oval Office.
Rule 4: Talk about the economy, not politics.
.. Mr. Trump blamed the Fed for October’s stock market selloff, calling the central bank “out of control.” The president told The Wall Street Journal Oct. 23 that Mr. Powell seemed to enjoy raising rates.
Not since the 1990s has a president leaned so hard on the Fed chief and never so publicly. On Monday, Mr. Trump told the Journal: “I think the Fed right now is a much bigger problem than China.”
.. The Fed’s benchmark interest rate is now in a range between 2% and 2.25%, well below long-run averages. The central bank is expected to raise rates by a quarter-percentage-point at its Dec. 18-19 meeting.
Mr. Powell says he is raising rates to return them to a more normal setting and avoid the type of boom-and-bust economy that ended in past recessions.
.. Mr. Trump has said he doesn’t plan on firing Mr. Powell, and it isn’t clear he could. The Federal Reserve Act states a Fed governor can only be removed for cause, a high bar that courts and legal scholars have interpreted to mean malfeasance or neglect.
.. The Fed’s credibility could suffer
- if investors believe its commitment to guard against inflation has been compromised by politics, or
- if Mr. Trump’s attacks sour the public’s view of the central bank.
“At some point, it becomes very damaging to the institution to be perceived as not acting in the best interest of America,” former Fed Chairwoman Janet Yellen said in an interview.
.. Mr. Powell has told others that he knows the president’s criticism could make his life unpleasant, but that he wouldn’t respond to political pressure. People close to Mr. Powell said he understood that history would judge him on policy decisions made over his four-year term.
- President Lyndon B. Johnson once summoned Fed Chairman William McChesney Martin to his Texas ranch to berate him for raising interest rates, saying it was despicable, according to Mr. Martin’s account.
- One low point for the central bank came when President Richard Nixon privately pressured Fed Chairman Arthur Burns to keep rates low before the 1972 election, according to Oval Office recordings. Mr. Burns kept rates low and inflation accelerated.
.. Shortly after President Reagan’s inauguration, a White House staffer asked Fed Chairman Paul Volcker if he wanted to host the new president at the Fed. Mr. Volcker declined, but replied he would be happy to meet the president anywhere else. They settled on the Treasury Department as a neutral ground.
Top Reagan administration officials frequently criticized Mr. Volcker, who presided over rate increases that triggered recessions in 1980 and 1981. But President Reagan refrained. “He just never did it,” Mr. Volcker said in an interview last year.
.. President George H.W. Bush’s Treasury Secretary Nicholas Brady cut off regular breakfasts with Fed Chairman Alan Greenspan to show his disapproval of tight-money policies in 1992. Mr. Brady stopped inviting Mr. Greenspan to dinner parties and golf dates at Augusta National.
“Our decisions can’t be reversed by the administration,” Mr. Powell said earlier this month in Dallas. “Of course, Congress can do whatever it wants.”
.. Messrs. Coons and Sen. Jeff Flake (R., Ariz.) later decided to send Mr. Trump a letter telling him to lay off the Fed.
“You appear to be telling the Fed what to do with interest rates, which we believe is unconstructive and dangerous,” the senators wrote the president.
.. In his new memoir, Mr. Volcker described how White House chief of staff James A. Baker III, with President Reagan watching silently, ordered the Fed chairman not to raise interest rates before the 1984 election.
Mr. Volcker, who wasn’t planning to lift rates anyway, didn’t tell colleagues or lawmakers about the episode. Mr. Baker has said he didn’t recall that.
NBC News and the Wall Street Journal polled his job approval. There was no appreciable change.
.. Why? The most important reason has to be the remarkable state of the American economy. On Election Day 2016, the Dow Jones Industrial Average closed at 18,332.43. On August 29, it closed at 26,124.57. That is an increase of some 40 percent. Other indices show similar gains. Growth in GDP went from 1.5 percent in 2016 to 2.3 percent in 2017 and, helped by the excellent 4.2 percent number in the second quarter, is forecast for around 3 percent in 2018.
.. The fact that presidents are not responsible for the economy does not stop the public from assigning them blame or credit. And Trump deserves some credit. His pro-business attitude stirs the bulls’ animal spirits. His deregulatory and tax policies contribute to growth. Trump understands that he is riding the bull — and that his following will be strong for the duration of the journey... The economic boom is crucial in understanding why Trump enjoys the 88 percent approval among Republicans that keeps him politically viable... Trump continues to goad, highlight, and benefit from an antagonistic news media. The overwhelmingly negative coverage of Trump paradoxically works to his advantage by driving his supporters to rally to his side. When the press gets a story wrong, Trump is vindicated. His voters have less reason to trust the elite media institutions they see as allied against them in a struggle over American identity... Media obsession with Trump and scandal helps the president in other ways. For one, the scandals are confusing and increasingly self-referential. Only political professionals and junkies can keep track of them. The headlines run together. The talking heads are background noise to men and women outside the bubble... The media fixation hands Trump the initiative. Because so much of the news is based on his Twitter feed, he can create storylines — and spark confusion and outrage — with the push of a button. This ability lets him shift attention from current controversies by creating fresh ones. The ongoing hysteria lessens the cost to Trump of each bad story. It also allows him to portray media institutions and figures as insiders contemptuous of Trump voters and eager to overturn the result of a presidential election.
Democrats — and most Republicans for that matter — have yet to grasp the ideas of political economy that Trump intuits: government that privileges American citizens through
- tight labor markets,
- border security,
- trade reciprocity, and
.. Nor do Democrats understand that American populism is not simply economic. It is cultural. It has long been associated with traditional values and practices, an unreconstructed patriotism, and support for law and order. No matter how well Democratic proposals might test, the party will not succeed at the national level unless it addresses and mollifies the social concerns of the white working class. Pelosi, Schumer, and Sanders have not tried.
With stock and property prices once again setting records, Jerome Powell may face some agonizing trade-offs
What if low inflation calls for low interest rates but those low interest rates make an eventual, destructive asset bust more likely? Should he lean against an incipient bubble by raising rates faster now, or plan to mop up the mess if assets collapse later?
.. no divine coincidence dictates that the same interest rate will achieve both 2% inflation and a stable financial system.
.. Before the global financial crisis, they concluded no: pre-emptively pricking bubbles seemed much riskier than letting them burst of their own accord. They are less dogmatic now.
.. In a 2015 speech, he said: “Tighter monetary policy might eventually be necessary” if dangerous risk-taking reappeared. A year ago, he went further: “The current extended period of very low nominal rates calls for a high degree of vigilance.”
The case for vigilance has only grown since.