LONDON, Sept 8 (Reuters) - Donald Trump's unfathomable link between U.S. interest rate policy and trade ties with America's biggest partners led to more head-scratching than market impact. But the strangeness of the president's take offers Federal Reserve Chair Kevin Warsh an opportunity to convincingly distance himself from the White House and bolster his credibility by pushing for a Fed rate rise this month.
Friday should have been a reasonably good day for the president on the economy. After all, August U.S. payroll gains were triple the forecasts, and much of the soft summer jobs picture was revised away as well. Diesel prices did hit a record high earlier in the day, potentially putting upward pressure on inflation. But tepid wage gains from the employment report could just as easily be read as another reason for the Fed to stand pat on rates as it awaits an inflation update this Friday - just days before its next meeting.
Trump needed some good economic news. Just two months ahead of midterm congressional elections, his overall approval ratings are stuck at the lowest point of his two terms in office, with 71% of Americans - including four in 10 Republicans - disapproving of his record on the cost of living.
However, instead of staying focussed on the positive August jobs readout, Trump quickly, and somewhat inexplicably, turned to the Fed, telling the central bank what it should do and threatening what he would do if it didn't follow suit.
"High interest rates put the U.S.A. at a very unfair disadvantage, and I won't allow that to happen!" Trump wrote on his Truth Social site, while extolling Warsh as "great". "We should have the LOWEST RATE of any country in the World ... LOWER THE RATE OR I’LL STOP TRADING WITH COUNTRIES WITH WHICH WE HAVE A DEFICIT," Trump added.
The main problem with this argument is that it makes no sense. Even commentators typically supportive of the president either gave up trying to work it out or just ignored it altogether. This apparent dismissal is somewhat remarkable given the market's concern over the president's relentless political pressure on the central bank over the past 18 months, including his willingness to use political appointments to force it onside.
Trump has repeatedly called for sharp interest rate cuts throughout his second term and threatened to fire Warsh's predecessor Jerome Powell on numerous occasions for not doing so. He has also regularly questioned why America's economic strength should not also see it have the lowest interest rates in the world, even though most economists would balk at the idea that borrowing costs should be cheaper for a fast-growing economy - it would typically be the other way around given the inflationary implications of a go-go economy.
More importantly, with core inflation above the Fed's target 2% now for 65 straight months, growth quickening, financial conditions loose and full employment effectively still in the bag, virtually no one thinks the Fed should be cutting rates right now. Even those who think that the September rate hike, that's currently more than 50% priced into futures markets, may be a tad premature.
Even if you agree with the call to lower interest rates now, despite the cost of living issues, linking the Fed's hesitation to do so with a threat to halt trade with foreign countries left most pundits and investors questioning whether the president had a grip on the basics.
TLT•
