President Trump’s relationship with Jerome Powell, his chosen Federal Reserve chairman, has been far from smooth.
As Trump sought to drive up the sub-octane Obama-Biden GDP growth rate for the US economy, he saw Powell’s historic caution about inflation, which meant keeping interest rates higher than they might otherwise have been, as an obstacle to making America great again.
The President cannot complain about Powell now. As the pandemic unfolded, the Federal Reserve provided huge support to the financial system with an unprecedented volume of bond buying while the key federal funds interest rate was lowered to 0.25 per cent, against 2.25 per cent a year ago.
Eyes right: Will it be Donald Trump’s narcissism and law and order which determines the election?
Last week Powell went a step further. Tearing up an inflation-beating strategy put in place by a predecessor more than 40 years ago, Powell rewrote the rule book by putting employment and growth centre stage by moving to an average inflation target over time. In other words, the Fed would allow deviations around the 2 per cent target and there would be no more precipitous rises in interest rates. Covid-19 put Trump and Powell on the same page.
With the clock ticking towards November’s election, how does this feed into the political narrative? Current wisdom is that Black Lives Matter and disorder on the streets will decide the outcome.
The slump and surge in joblessness caused by Covid suggested that Trump’s goal of re-election on the back of soaring output and a booming stock market was a dead duck. It will be Trump’s narcissism and law and order which determines the election.
But I am not so sure. Historically ‘pocket book’ issues settle American elections and Bill Clinton’s aphorism ‘it’s the economy, stupid’ is as relevant today as ever.
The pandemic economy hit rock bottom in the US some months ago. And although the scarring is severe, the desired ‘V’ shaped recovery is underway.
Economic forecasters have been quietly rewriting predictions for the third quarter in favour of an annualised snap back of 30 per cent or around 8 per cent (in the terms we use).
The US housing market is soaring on the back of record low interest rates and consumption has rebounded robustly. The big minus is the expiry of the $600 Covid unemployment subsidy which could lower personal incomes by $1 trillion.
Renewing the fiscal stimulus is a huge problem for the Democrats on Capitol Hill. If they do, they will be accused of helping the Trump-Pence ticket. If they don’t, it will look as if they are uncaring and lukewarm in support for Joe Biden’s plan to better look after blue collar and middle class workers.
Trump’s hapless handling of the pandemic gives Biden a weapon. The reality is that the US economic fallout from Covid, as bad as it has been, is not out of line with the other Western democracies.
Trump’s first-term agenda of lower corporate taxes, tax breaks and deregulation together with the trillions pumped into the economy since the pandemic are fuelling recovery. Biden laudably proposes to raise corporate taxes to funnel more cash to Obamacare and middle-Americans. But the last thing needed anywhere at present is tax rises that punish enterprise.
At Jackson Hole last week, both Powell and the governor of the Bank of England Andrew Bailey, in different ways, made it clear that easy money is here for the medium term. That allows nations to finance bigger budget deficits at low interest rates.
Easy money could yet romp to Trump’s assistance.