President Trump has for many months now been lining up Fed chairman Jerome Powell as one of the key scapegoats he’ll be able to turn to if US economic growth slows further coming into the 2020 election.
In that context, the Fed’s 25 basis point cut announced on Wednesday was a gift. From Trump’s point of view the cut was in the right direction, but neither steep nor sustained enough. Indeed, what was most salient about the Fed’s first rate cut for eleven years wasn’t so much the cut itself as the commentary which surrounded it.
Powell stated without equivocation that the cut was to regarded as a “mid-cycle adjustment” and by no means as the start of a prolonged programme of further cuts.
It was noted too that there were two dissenters on the Federal Open Markets Committee who didn’t want to cut at all. Clearly the Fed has no deep appetite for cutting rates when the US economic growth remains relatively strong, unemployment is low and inflation is broadly under control.
After all, reticence to cut in such circumstances would be considered completely orthodox in any normal set of circumstances, and it’s only the unique situation created by President Trump’s tariff-related trade war that’s really made the difference here.
It’s perhaps too strong a statement to say that Fed chair Powell is overly concerned by the slowdown in global economic growth, given that the latest cut has widely been regarded as “hawkish”, but there’s no doubt it is a factor.
The latest manufacturing PMI numbers underline the point. While commentators in the UK bemoan dire PMI manufacturing numbers as being a harbinger of Brexit, it might be worth them looking up and east for a moment or two to see what the picture looks like in Asia. Because Chinese, Japanese and South Korean manufacturing PMI data is all showing below the magic 50 mark that signals growth.
Britain might be doing badly, but the wider context isn’t exactly providing a complete contrast.
On the contrary, the tariffs are having a real impact, as Mr Trump hoped they would. But the question that remain is: will it be enough to move the Chinese substantially on trade?
Some commentators think yes. They note recent decisions by major companies like Puma to move manufacturing out of China to other nearby markets, and they note too the broader trend of slowing Chinese economic growth.
But that slowing of Chinese growth was bound to occur at some stage. Double digit growth was never sustainable, and even the current rates of around 6% look extremely attractive from a Western point of view - that Chinese growth will eventually come into line with other developed economies is inevitable, even if there is some uncertainty about the timing.
What’s more there’s plenty of appetite to resist Western (read US) pressure on China to conform to certain norms. This is a country that’s been through the Cultural Revolution and the Great Leap Forward: it can certainly resist the economic pressure of a tariff war if it so chooses.
What’s more, there is some awareness that the next US election is now less than 18 months away. Mr Trump knows this well enough. It’s why he’s been publicly badgering Mr Powell to provide him with an alibi.
But the Chinese know it too. There may be some calculation that on their side now that a waiting game is their best strategy, since a change in administration may present them with a less pugnacious counterparty in negotiations. But Trump has warned against this. If he wins again, he says, and the Chinese have not by that time already concluded a deal, he will come down on them doubly hard.
And it’s in this context, with manufacturing PMIs around the world already under pressure, that Mr Powell is justified in his caution.