Powell Just Learned the First Rule of Trade Fight Club

(Bloomberg) --

Jerome Powell just learned the first rule of trade fight club: No one wins.

Not even the Federal Reserve chairman, who cut interest rates on Wednesday despite an unemployment rate near the lowest level since the 1960s, a roaring stock market and an economy that President Donald Trump has called the best ever.

Explaining the central bank's first rate reduction in more than a decade, Powell cited the economic drag of U.S. trade policy uncertainty. Without naming names, he attributed the dimmer growth outlook to America's tougher approach with its trading partners.

His reward for juicing the punch bowl? A Twitter shaming from the president and another request to get with the White House's economic program, which targets Chinese and European trade imbalances and wouldn't mind a weaker dollar.

“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world,” Trump tweeted Wednesday. “As usual, Powell let us down.”

There's more at stake here than the reputations of two of the world's most powerful men. The growing view among Wall Street economists is that the Fed's embrace of lower rates risks exacerbating a trade war now in its second year.

By reducing borrowing costs, the argument goes, the Fed will buoy financial markets and an economy weighed down by policy unpredictability. That will empower Trump to dial up his clash with China — or perhaps start one with Europe — by allowing him to avoid the consequences of his actions.

Citigroup economists Cesar Rojas and Catherine Mann last week wrote that “looser monetary policy amid robust growth, low inflation and high stock prices could indeed give the U.S. administration additional room for a more aggressive trade policy stance.” That wouldn't be good, they said, as it “would prolong the uncertainty currently clouding the global economy.”

Charting the Trade War

The pound's latest slump is unlikely to provide a fillip to U.K. exporters, if recent history is a guide. Sterling's decline after the 2016 EU referendum, which coincided with a period of global strength, didn't see the economy enjoy a boost from net trade.

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