Asia has three trillion reasons to worry about Donald Trump’s bizarre brawl with the Federal Reserve.
That’s how much, in US dollar terms, the region’s nine-biggest holders of Treasuries are on the hook for as the White House trolls markets. Asia’s central bankers have every reason to fear the worst as President Trump adds Fed chief Jerome Powell to his enemies list.
Bizarre, because Powell is Trump’s guy. Earlier this year, Trump chose the investment banker to replace Janet Yellen, a widely respected Fed chair. Yellen’s only sin, it seemed, was being hired by Trump predecessor and nemesis Barack Obama.
With Powell, Trump assumed (wrongly) that he’d found a compliant, easy-money ally to be his own personal ATM.
President assaults own appointee
After taking over the Fed’s reins in February, Powell has presided over two tightening moves – 25 basis points each. The minutes of the Fed’s July 31-Aug. 1 policy meeting signal more hikes are coming. “Many participants,” the Fed says, “suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation.”
Since then, unemployment has fallen to 3.9%, pointing to a robust economic trajectory at odds with a benchmark target interest rate of between 1.75% and 2%. Today’s 4.1% growth rate is double US borrowing costs, even as a $1.5 trillion tax cut adds fresh fuel.
Powell will be detailing his latest thoughts beginning tomorrow at the Fed’s annual retreat in the mountains of Jackson Hole, Wyoming. Expect a commitment to stay the gradual tightening course on which the Yellen Fed embarked in December 2015.
Trump, though, is already creating an alternative reality. In an August 20 Reuters interview, he said of Powell: “I’m not thrilled with his raising of interest rates, no.” Instead, Trump said, “I should be given some help by the Fed. The other countries are accommodated.”
It’s hard to know where to start in fact-checking that one. The Fed has been in excessive “help” mode for a decade now, ever since Lehman Brothers crashed in September 2008. Now, as the US experiences a rare late-cycle growth spurt, the Fed frets about excesses. And that is what central bankers do.
What’s more, Trump’s escalating assault on the Fed is as unprecedented as it is dangerous.
The only time in living memory a US leader meddled with Fed policy was in the early 1990s, when then-President George H.W. Bush dropped some cryptic hints that the Alan Greenspan Fed should go easy on rate hikes. After he lost the 1992 election, Bush would later blame the central bank. In trying to avoid a similar fate, Trump has already gone too far.
In mid-July, Trump told CNBC: “I’m not happy about” the Powell Fed yanking away the monetary punchbowl. He added: “I don’t like all of this work that goes into doing what we’re doing … and then I see rates going up.”
This interventionism is a feature of Trumponomics. A month earlier, in June, White House economist Larry Kudlow urged Powell’s team to only raise rates “very slowly.” Yet Trump’s recent comments suggest the Fed is in harm’s way going into the November mid-term elections – and beyond.
What it means for Asia
All this poses multiple risks for the region.
Extreme uncertainty is one risk, particularly with Trump intensifying attacks on China’s currency policies. Japan’s, too, as Trump ups accusations of “manipulation.”
A dollar plunge is a second that would put Asia’s export-reliant economies at risk. A third risk is potential paper losses on the above-mentioned $3 trillion-plus of US public debt holdings.
There’s a certain sadism inherent in Trump’s trade wars against China, Turkey and other economies at this point. He seems willing to do just about anything to inject pain into rivals or change news cycles dominated by scandals.
And on the campaign trail, remember, Trump even raised the specter of defaulting on US debt. “I would borrow,” Trump said in May 2016, “knowing that if the economy crashed, you could make a deal.” That’s hardly what Washington’s prudent Asian bankers want to hear from a former real-estate mogul with a history of bankruptcy filings.
Now, add Trump’s surreal clash with his own hand-picked Fed leader. Overseas investors don’t pay much attention to Trump’s attacks on, say, US Attorney General Jeff Sessions. But Trump giving Powell the Sessions treatment on Twitter is a clear and present danger to Asia’s growth outlook – trillions of dollars of state funds.