Donald Trump’s attack on the Federal Reserve is just a distraction

The US president diverts attention away from the slowing economy and ballooning deficit

Gillian Tett

The US president broke with convention by saying he was not happy with the choice of Fed chair Jay Powell © AFP

How should investors “read” the pronouncements of Donald Trump? That question has prompted endless debate around the world in the past two years. But here is a new answer: try an Agatha Christie novel.

Yes, you read that right. Any fan of her mystery books knows that distraction is a powerful plot device: if there was a commotion in the kitchen, detective Hercule Poirot would look for a body in the library, or other clues being hidden in plain sight, amid the noise.While Mr Trump has never admitted to be a Christie fan, his tactics — or instincts — might usefully be viewed in this light. Whenever the US president’s startling pronouncements create an attention-grabbing storm, investors must ask what bodies are being disposed of, amid the melodrama.

Take this week’s events concerning the US Federal Reserve. On Sunday, Fed-watchers were startled when the Washington Post published an interview with Mr Trump, in which he breached all convention by saying he was “not one little bit happy” with his choice of Jay Powell to chair the central bank. Apparently this was because Mr Powell has raised rates, and signalled he will continue doing so. The Fed “is way off base with what they are doing”, Mr Trump declared.

The remarks put Mr Powell firmly in the spotlight when he delivered a long-planned policy speech in New York on Tuesday. When the Fed chair modified his tone — fractionally — on policy, noting that rates were “just below” levels that would be neutral for growth and inflation, the stock markets soared as investors concluded that he was changing course after Mr Trump’s broadside. Indeed, Jim Cramer, the TV pundit, declared that “the Fed blinked!”

As plot-lines go, this makes for dramatic viewing, not least because it gives Mr Trump the type of starring role he adores. But like any mystery novel, there is more than meets the eye.

For one thing, Fed officials had been saying for a couple of weeks that they find it very hard right now to see where the “neutral rate” should be, and thus how much further rates should rise. Rich Clarida, deputy Fed chair and a man who has hitherto enjoyed the luxury of being ignored by Mr Trump, said in mid-November that the Fed was essentially in “ a dark room”, in policy terms, trying to avoid stubbing its toes with mistakes. He stressed that the Fed would be “data dependent” in setting policy, since rates are “by some estimates close to neutral.”

Mr Powell’s speech, which was largely written before the president’s broadside, essentially echoed the same point. He notably did not rule out more rate rises. As such, it represents a thoroughly sensible stance. To put it another way, this is merely half a “blink” in the face of global uncertainties.

But more important issues were not widely discussed amid the noise. One overlooked item was a warning from Mr Powell that risky corporate debt has surged and “highly leveraged borrowers would surely face distress if the economy turned down.” Another was the raging debate about how fast the Fed should reduce its balance sheet. This is receiving little or no public attention, even though the shrinkage is having as much, if not more, impact on financial conditions than policy rates.

Investors should also consider the relative silence around the fact that the US deficit is nearing the $1tn mark for the first time in history and recent signs that the US recovery is softening. Consumer confidence and house sales have declined and US farmers are suffering as soyabeans rot in silos, amid the trade war with China.

The automotive sector also fits the Christie narrative. Mr Trump grabbed attention with strident tweets attacking General Motors over planned US plant closures, and contrasting it with BMW’s announcement of a new US plant. But what has barely been discussed is the deep irony of the current trade threats over cars. The main automotive exporters from the US to China are not Detroit’s big three carmakers but German-owned groups including BMW. They have every incentive to move production to China if retaliatory tariffs are imposed.

A cynic might argue it was ever thus: any effective politician knows how to bury bad news and shape the agenda. And Mr Trump has every reason to attack Mr Powell or GM. He will need somebody to blame if (or when) the economy slows down.

But here is the key point: in a world of information overload, Mr Trump uses the weapons of distraction more effectively than almost any leader before him. So by all means gawp at this week’s Fed drama. But remember: Poirot would not be fooled.

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