Donald Trump has long cited Opec – the intergovernmental organisation of oil-exporting countries – and the US Federal Reserve as the two biggest impediments to his re-election. He also acts as if his best tactic for overcoming them is aggressive tweeting. When oil prices rise too much, he implores Opec to “increase the flow of oil”. When economic growth falters, he demands that the US central bank “LEADS”.
With oil prices having tumbled in January and then collapsed after the arrangement between Russia and Saudi Arabia over crude production broke down, the Fed has been Trump’s principal electoral foe. Since the central bank began to cut interest rates last summer, Trump has complained that it is “way too slow to cut”, leaving the US at a “competitive disadvantage” against the eurozone and Japan. On 3 March (which was also Super Tuesday in the US presidential primaries) the Fed obliged with an emergency 0.5 per cent cut in interest rates – its first since 2008.
The chair of the Federal Reserve, Jay Powell, stressed that he and his colleagues were responding to coronavirus, not the president. But Trump no doubt would have regarded the cut in rates as a victory against an institution that he sees as a more serious opponent to his political fortunes than either Joe Biden or Bernie Sanders.
The strength of the US economy has looked like Trump’s surest path to re-election this November. The unemployment rate is at a 50-year low; a Gallup poll published in February showed that 61 per cent of Americans think they are better off now than when Trump’s presidency began in 2016; they also think that Trump should get the credit. No president running for re-election has enjoyed such a figure since the 1980s. Regardless of how effective Trump’s eventual Democratic opponent is in exploiting his weaknesses, it would seem like folly to bet against the incumbent.
Since wage growth has been strongest for the US’s lowest-paid workers, Trump can also claim that his policies have rewarded those whom he promised in 2016 would no longer have to endure politicians who “prospered” while “the jobs left, and the factories closed”. He seems particularly determined to claim credit for the fall in African-American unemployment to a record low, in the hope of widening his electoral coalition.
Yet for all Trump’s crudeness and absurdity, his instinct to berate the Federal Reserve reflects a justified nervousness that the American economy is far from robust. Where Trump is mistaken is in presuming that the Fed can help him.
More than a decade after the financial crash of 2008, there are deep structural problems with the US and world economy. The labour participation rate may have stabilised in 2016 after declining for a decade and a half, but there has not been a decisive improvement in the size of the economy’s active workforce.
During the 2016 election, Trump promised annual economic growth of more than 3 per cent, and suggested 5 or 6 per cent was possible. But the last time growth hit 3 per cent was in 2005. Since 2016, there has been a persistent gap between expressed consumer confidence and actual consumer expenditure; Trump’s success in making voters feel that they are better off appears to derive from the way he appeals to their emotions instead of their reason.
Nothing the Fed has tried has altered the pattern of short-term higher growth followed by significantly slower growth. Other central banks are not doing any better. Even before the coronavirus outbreak, the talk in 2017 of “synchronised global growth” had already become what the International Monetary Fund described as a “global synchronised slowdown”.
Loose monetary policy, such as ultra-low interest rates, has been the instrument of choice for policy-makers. But it won’t cure sluggish growth. The Fed’s latest interest rate cut is not entirely devoid of benefits – the 30-year mortgage rate fell to a record low. But it won’t insulate the economy from a coronavirus shock.
Since coronavirus has inflicted a simultaneous shock to supply and demand – everything from disrupting Chinese production to a sharp reduction in people travelling and spending money – the lending conditions for banks will change little. The problem of post-2008 monetary policy has been that low interest rates have only benefited a few economic sectors, such as shale energy, rather than acting as a broad stimulus.
Chaos ensued in the financial markets after the Fed announced that it was cutting rates. Shares slumped and ten-year American Treasury bonds fell to below 1 per cent for the first time in history. These markets recovered, only for share markets across the world to slump and bond yields to fall further. Investors seem to be telling the Fed that they now expect further interest rate cuts. But the Fed will soon reach the point where it cannot cut without venturing into negative rates – difficult territory, as the European Central Bank has already found.
All this market volatility introduces an element of economic disquiet to the American presidential election. Trump’s emergence in 2016 as a candidate willing to confront China had some logic in the politico-economic context at the time. His presidency marks the end of the old US-China economic relationship: American manufacturing jobs are no longer subordinate to trans-Pacific supply chains, and it has dispelled the illusion that trade would change China’s politics.
Trump’s vulnerability has always been economic events arising from forces that prove unsusceptible to a reset. In this case, the Fed giving him exactly what he wanted has precipitated a financial meltdown.
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This article appears in the 11 Mar 2020 issue of the New Statesman, How the world is closing down