Carney, Powell stand up to Trump

Gordon L. Weil

President Trump seems to convert almost all leaders into fans, mostly because they know he thrives on flattery.  He readily accepts their artificial praise.

The media likes to report how he forces skeptics or critics to appease him in pursuing their own interests.  They end up settling for less than his original demand and consider the deal a win or else helplessly let him take advantage of them.

But this week, two people have carefully stayed on their own course despite his pressure.  Canada’s Prime Minister Mark Carney and Federal Reserve Chair Jerome Powell stand out from crowd.

When Trump first sharply hiked tariffs, then Canadian Prime Minister Justin Trudeau promptly retaliated.  His countermove, rare among the early U.S. tariff victims, was designed to get the U.S. to retreat.  Tariffs between the two countries soared to the point that would harm both sides.

To his credit, Trump realized he had gone too far, depriving the U.S. of needed fuel and raw materials.  He eliminated tariffs on trade under USMCA, the trade agreement among the U.S., Mexico and Canada.  Major barriers remained on steel, aluminum, autos and softwood lumber. 

The Canadian government changed when Carney took office.  Politically, he could not quickly reciprocate for the Trump cut, though he recognized that its effect on essential imports was harming Canadian consumers and industry.   He also found that the overall effect of the USMCA preference gave Canada the lowest U.S. tariff at 5.6 percent.

Trade talks repeatedly missed deadlines as Canada held firm.  To negotiate with the U.S. and provide some relief to Canadians, Carney has just reciprocally reduced Canadian tariffs to the USMCA level.  Some in Canada erroneously saw this move as appeasement, ignoring the fact that the U.S. had moved first.

Before acting, he called Trump, who apparently accepts Canada’s independent policy and recognizes U.S. dependence on some Canadian imports.  The New York Times reported that Trump said that he and Carney “are working on something.”  He continued, “We want to be very good to Canada. I like Carney a lot. I think he’s a good, good person.”

Carney had been ready to seek other trading partners.   Now, a deal on autos is likely and accords on the other three products are possible.  The U.S. and Canada may also be finding areas of agreement on the upcoming revision of the USMCA, under which Mexico has gained the most benefit.

If Trump has kind words for Carney, despite the Canadian’s independent stance, he does not hold back when it comes to the Federal Reserve’s Powell, whom he calls a “numbskull” for refusing to cut interest rates.  He’s gradually realizing that Powell does not act alone and that the kind of deep cuts he wants aren’t likely, no matter who sits on the Fed’s Open Market Committee.

Powell, who clearly believes in the Fed’s independence from the politics of the day, appropriately refrains from answering Trump’s attacks.  To do so would plunge the Fed into politics.

The Fed’s missions are maintaining full employment and controlling inflation, striking a delicate balance with the entire world waiting to judge its actions.  In recent years, it has leaned toward the fight against inflation.  Now, Powell’s analysis suggests that the Fed can ease up on inflation and reduce the interest rate until it sees the impact of higher U.S. import tariffs.

The current Federal Funds interest rate, used for lending among banks and dominating short-term interest from credit cards to mortgages, is set between 4.25 and 4.5 percent.  In July, two Trump appointees favored a one quarter percent cut, hardly the three percent that Trump wants, while the majority left the rate unchanged.  The media exaggerated this small difference.

Trump and his economists could have sat with Powell and made the case that the inflation risk is less worrisome, avoiding the usual unrealistic demands and threats.  The president would have been playing, perhaps persuasively, on the Fed’s court, but that’s not his style.

Instead, Trump attacked.  Based only on an unsubstantiated charge that a Fed member had cheated on a mortgage application, he demanded her resignation.   Knowing that it was grandstanding, the Justice Department baited Powell by demanding he fire her, though he has no such power.

The U.S. and much of the world depend on a soundly managed American economy and dollar, still the international reserve currency.  Trump would willingly endanger both if he could claim before the next election that he had boosted the economy to new heights.  He expects his Fed appointees to be his foot soldiers in this effort.

There’s no doubt that higher tariffs will increase some costs and prices.  Trump cannot make Powell responsible for that, simply because he won’t lower interest rates.  Trump may not understand that, but Powell does and holds firm.  So far, that works.