As the Federal Reserve begins a two-day meeting widely expected to yield the first interest-rate reduction in 11 years, President Trump reiterated that the size of the shift matters to him.
“I’d like to see a large cut,” he told reporters Tuesday, before leaving the White House for Virginia. Additionally, Trump said, the central bank should immediately stop paring a balance sheet that ballooned to $4.5 trillion as the Fed purchased government debt and mortgage-backed securities to amplify the benefits of near-zero interest rates during a plodding recovery from the 2008 financial crisis.
While Republican lawmakers lambasted the so-called quantitative easing program in the waning years of the Obama administration, Trump says reversing it and raising interest at the same time undermined his efforts in the White House.
“The Fed moved, in my opinion, far too early and far too severely,” he said Tuesday. “It puts me at somewhat of a disadvantage. Fortunately, I’ve made the economy so strong that nothing’s going to stop us.”
….countries that know how to play the game against the U.S. That’s actually why the E.U. was formed….and for China, until now, the U.S. has been “easy pickens.” The Fed has made all of the wrong moves. A small rate cut is not enough, but we will win anyway!
— Donald J. Trump (@realDonaldTrump) July 29, 2019
Both GOP-led tax cuts and Trump’s loosening of federal regulations have buoyed business growth, economists say, but the trade war that has become a cornerstone of his first term has softened it — and is among the reasons the Fed’s monetary policy committee is considering lowering rates now, possibly as much as 50 basis points.
The tariffs on $250 billion in Chinese imports that Trump has imposed have driven up consumer prices, eroding corporate profits, and his threats of levies on items from French wines to Indian and Vietnamese goods as well as automobiles have left executives wary of investing money in new products and factories.
“The Fed appears to want to deliver an insurance cut to stave off the risk that trade uncertainty weighs on business investment and growth,” said Mark Haefele, global chief investment officer for the wealth management business at Swiss lender UBS.
Brexit, the withdrawal from the European Union that British voters approved three years ago, presents additional challenges, Federal Reserve Chairman Jerome Powell has said. The country is the world’s fifth-largest economy and how leaving the EU without a trade deal in place would affect it is unclear.
Such challenges, and comments from Federal Reserve policymakers, have spurred speculation that the central bank may double the size of its typical 25 basis-point changes in short-term rates when it makes a decision Wednesday. Trading in interest-rate futures tracked by CME Group shows 22% odds that the Fed will drop its benchmark to a range of 1.75% to 2% and a 78% chance of a smaller cut that would leave it at 2% to 2.25%.
The reduction would mark an end to nine straight rate increases, seven since Trump took office, that followed seven years of near-zero rates. When former President Barack Obama left office, the federal funds rate was still less than 1%.
“Obama had zero interest rates; we have ‘normalized’ interest rates,” Trump said Tuesday. “With zero interest rates, anything happens, and yet we still blew his economy away.”
The U.S. would be in an even better position, with the Dow Jones industrial average 10,000 points above its current level of about 27,000, but for the Fed, the president maintained.
“I think they acted too quickly, by far, and I think I’ve been proven right,” he added. “People said I was right, and they were wrong. The Fed is often wrong.”
Along with scrutinizing interest rates, investors and Trump himself will be looking Wednesday for any hints of a change in the Fed’s balance-sheet reduction. Rather than sell its securities, which would have had a more dramatic effect on financial markets, the central bank began paring in 2017 the amount of maturing notes that it reinvested.
That has lowered the Fed’s portfolio 15% to $3.8 trillion — nowhere close to the $865 billion level before the crisis, and Michael Gapen, an economist with British lender Barclays Plc, said an immediate halt is unlikely.
“The Fed has consistently said it will use” interest rates to fine-tune monetary policy, and the committee has already signaled it plans to end balance-sheet reduction in September, Gapen said. “Members are not likely to see an earlier end to balance sheet normalization as adding much value at this stage.”
