This week in Trumponomics: A flash of panicRick Newman
Senior Columnist
Yahoo Finance October 12, 2018
Can President Trump handle bad economic news?
His tenure so far has been economically upbeat, with decent economic growth, a strong job market and an ongoing stock-market rally. But an abrupt pullback in stocks this week startled investors, and apparently, Trump, as well. And the president’s reaction suggests he won’t be a source of calm, reassuring leadership if there’s a real economic crisis.
After the S&P 500 fell by 3% on Oct. 10, Trump went on a tirade against the Federal Reserve, which he blamed for the selloff. “They are raising interest rates and it’s ridiculous,” Trump told Fox News. “There is no reason for them to do it and I’m not happy about it.” Trump went on to describe the Fed’s monetary policy as “crazy,” “loco” and “going wild.”
Nobody else thinks the Fed is crazy. The Fed has been gradually raising interest rates since 2015, to push rates from insanely low levels back toward historical norms. This raises borrowing costs, of course. But that’s the point: When money is super cheap, it stimulates overborrowing and often leads to a credit crisis. The Fed also needs to push rates higher so it will have room to cut rates during the next recession, which is the traditional way it helps boost the economy during a downturn.
Trump apparently thinks it’s desirable (and possible) to have extraordinarily low interest rates forever, even though there’s ample evidence this is dangerous for the economy. He has expressed displeasure with the Fed before, describing himself as “a low-interest-rate person.” Well, of course he is. As a real-estate developer, Trump benefited when he could borrow cheap. But he also suffered when rates that were too low for too long contributed to an overheated economy and a recession, leaving fewer people able to afford a visit to his casinos or his resorts.
Trump’s needless scapegoating and disregard for long-term consequences send the Trump-o-meter to a WEAK reading this week. That’s our third-lowest.
Trump has a looming problem with the stock market. He takes credit when it goes up, but blames others when it goes down. So far, he’s gotten lucky. There was a bare-minimum correction earlier this year, but stocks have mostly gone up during his 20 months in office. He hasn’t yet had to explain tough times to a worried nation.
But if Trump finishes his four-year term, it’s highly likely he’ll have to lead America through a more sustained correction (a 10% drop in stocks) or a broader bear market (a 20% drop). If Trump tees off on the Fed following a relatively modest decline, what kind of attack will he mount if 401(k) balances are plunging, along with Trump’s already weak approval rating?
Trump’s aides might be wondering the same thing, which is why they’ve hustled to explain what the president really meant to say about the selloff and the Fed. Treasury Secretary Steven Mnuchin and White House economist Larry Kudlow characterized the selloff as a “natural” and “normal” correction unrelated to Fed policy.
Mnuchin semi-explained Trump’s Fed bashing by telling CNBC the president objects to raising rates when inflation is under control. But that’s exactly when the Fed needs to raise rates, because if it waits until inflation is out of control, it has already failed. That’s probably why Mnuchin said it’s Trump’s view—but not his own.
Markets recovered some of the lost ground, and it’s entirely possible they’ll hit new highs in coming weeks. Trump will crow. But his disproportionate sensitivity to modest downturns augurs a spasm of scapegoating if there’s a large and sustained market selloff, or even worse, an actual recession.
If the president can’t digest economic turbulence, what are the rest of us supposed to do?
http://finance.yahoo.com/news/week-trumponomics-flash-panic-182124492.html
