Fed Chair Jerome Powell says he can’t fix trade war’s damage to the economy

On Twitter and elsewhere President Trump has consistently pushed the Federal Reserve to lower interest rates to boost the economy. The president’s basic desire for a more growth-oriented Fed (an idea articulated in a clearer and less demagogic way this week by Senator Michael Bennet) makes some sense. But Trump consistently links it to his trade policies vis-à-vis China, suggesting we would be more likely to prevail in his instigated trade wars if the Fed would help him out.

Speaking today at an annual monetary policy conference in Jackson Hole, Wyoming, Fed Chair Jerome Powell fundamentally rejected this analysis, saying trade wars hurt the economy in ways he can’t fix.

“Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” he said and acknowledged that monetary policy can and should take that into account.

But at the same time, he argues that “while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade.”

In other words, he can try to partially heal the damage caused by trade disruptions, but he can’t actually make them go away or change the fact that this is a negative-sum dynamic.

On a more basic level, the basic issue is that setting interest rates low is a tool that’s designed to stimulate demand — to make people and companies want to accelerate their spending plans.

This is useful in many contexts, and it can help offset the demand-side consequences of trade disruptions. For example, if a trade dispute with China leads Chinese airlines to order fewer US-made airplanes, low interest rates might make it more likely that American Airlines will order them instead. Alternatively, a lower price for the US dollar might make it more likely that Indian or Brazilian airlines will buy those US-made planes.

But the impact of trade wars is more far-reaching and complicated than that. Del Monte Foods, for example, is closing two American plants in part because Trump’s tariff policies have made metal more expensive. Stimulating demand can’t help with that. Trump’s tariffs on imported appliances, similarly, have let US manufacturers get away with raising prices. That’s nice for them but a hassle for consumers. And the Fed has no power to fix that. If anything, higher prices for some consumer goods make it harder for the Fed to stimulate the economy by raising the risk of inflation.

It’s fundamentally a mistake to think that appropriate monetary policy can or should compensate for flawed policy elsewhere.

During the Obama administration, conservatives often criticized the Fed for trying to address clear demand shortfalls on the grounds that “improvements in tax, spending, and regulatory policies must take precedence in a national growth program, not further monetary stimulus.”

This was wrong. Where monetary stimulus is useful, it’s a good idea to provide it whether or not better policy in other areas would also be useful.

In the present day, Trump is making the same mistake in the opposite direction — thinking that if his own policies are damaging that the Fed somehow can make the damage go away. Powell’s point is that this doesn’t work. Good monetary policy is better than bad monetary policy, but good trade policy is also better than bad trade policy. They impact the economy in ways that are only partially overlapping and can’t substitute for each other.