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How Politics Constrain the Federal Reserve and Other Economists

JACKSON, Wyo. — As top economists from around the globe gather for their annual conference at Jackson Hole this week, they will have a collective hope in mind: that the world’s political leaders will work to help safeguard economic growth.

Economies from the United States to the European Union to China are slowing, presenting a challenge for central bankers, whose tools are limited at a time when interest rates remain historically low in much of the world.

In the United States and Britain, central bankers are hoping that trade uncertainty and political strife will not kill long economic expansions. And from Australia to Europe, economic policymakers have been urging politicians to step up their spending, hoping that a hand from the government will spur consumption and keep their economies from tipping into recession.

But there is a vast divide between technocrats trying to salvage waning global growth and politicians with an eye on their voting bases.

President Trump is locked in a trade war with China, with the latest round of tariffs scheduled to take hold on Sept. 1, and he shows no intention of backing down. American tariffs on European automobiles remain a possibility. Britain is negotiating its exit from the European Union and the likelihood of a no-deal departure, which could be economically punishing for the country and its major trading partners, has escalated with Boris Johnson’s ascendance to prime minister.

Complicating matters is Mr. Trump’s view that what is good economically for other countries is bad for the United States — a position that has led him to criticize efforts by central banks to keep their expansions on track. On Thursday, he once again needled the Federal Reserve Board over Germany’s low interest rates, suggesting that negative interest rates on German bonds were putting the United States at a disadvantage.

“Germany sells 30 year bonds offering negative yields,” Mr. Trump wrote on Twitter. “Germany competes with the USA. Our Federal Reserve does not allow us to do what we must do. They put us at a disadvantage against our competition. Strong Dollar, No Inflation! They move like quicksand. Fight or go home!”

Global political brinkmanship is adding to uncertainty just as factories around the world slow production and businesses hold off on investment, stoking fears of a more concerted slowdown.

“Important countries are not in good shape,” said Roberto Perli, head of global monetary policy research at Cornerstone Macro, who said there was a risk of a significant and protracted global slowdown with the potential for outright recessions in some nations, like Germany. “It started for largely cyclical reasons, but since then, other factors have intervened — trade, most importantly.”

While central bankers strive to be politically independent and avoid giving elected leaders advice, they have acknowledged that government policies are threatening growth.

The Fed cut interest rates for the first time since the Great Recession in July, a move driven in part by Mr. Trump’s trade policies and partly by the broader slowdown in global growth. Jerome H. Powell, chair of the Federal Reserve, speaks on Friday and is expected suggest that additional rate cuts are on the table without signaling how many or giving a specific timeline. Tariffs — and their likely escalation — are keeping the Fed and its global counterparts on edge.

“We’re in a period when the center of gravity, the fulcrum, of U.S. economic policy is probably away from monetary policy and more in the area of trade policy, immigration policy” and other political areas, said Robert S. Kaplan, president of the Federal Reserve Bank of Dallas, said in an interview at the Jackson Lake Lodge.

Mr. Kaplan said that it is “prudent to take more time” before deciding whether or not the Fed should cut rates again in September. He does not vote on monetary policy this year, but has a seat at the table where rate decisions are made.

Asked if he expect additional rate cuts this year, he said that he is “open-minded that we may need to make further adjustments to the fed funds rate beyond what we did in July.”

But central bankers have begun warning that their ability to defend their economies is limited, especially because many never managed to sustainably lift interest rates back from rock bottom after cutting them during and after the global financial crisis.

Many are looking to their political leaders — who will gather in Biarritz, France, for the Group of 7 meeting this weekend — to help keep the world’s prosperity going.

“Policymakers around the world pulled the easiest lever, which is the monetary lever,” Mr. Perli said. “The more a central bank eases, the less powerful monetary policy becomes. We are at the point where, if we want to accomplish something — especially in countries like Europe — the ball is in the fiscal policy territory.”

But “that’s complicated,” he said, “by budget constraints in some countries and political constraints in other countries.”

While consumer spending is holding up in the United States and growth remains decent, manufacturing is slowing and consumer confidence sank in August. Businesses reported holding off on investment as they waited to see how the trade war plays out.

Mr. Trump has also begun mulling more tax cuts to lift the United States economy, though on Wednesday he insisted that it did not need one right now. And the Fed has room to cut rates, should a recession hit. The challenge is primarily one of intense policy uncertainty.

Europe, by contrast, has negative interest rates and a fraught economic backdrop — and while that owes more to fundamentals and global spillovers than domestic politics, growth is getting little help from national governments. In Germany, where China’s slowdown is hurting the manufacturing sector and the economy contracted in the second quarter, the government has been slow to spend more aggressively. Italy is also struggling, but it already has a heavy debt load, limiting its room to maneuver.

The European Central Bank, which runs monetary policy for 19 European countries, is expected to cut interest rates deeper into negative territory and even consider asset purchases in a bid to protect growth — but it is low on ammunition.

“Monetary policy has done a lot to support the euro area and continues, as you can see today, to do a lot,” Mario Draghi, the outgoing head of the central bank, said at a news conference last month. “But if we continue with this deteriorating outlook, fiscal policy will become of the essence.”

German politicians do seem to be cracking open the door to more spending, with Finance Minister Olaf Scholz indicating that the government could make up to $55 billion available. For scope, that is equivalent to a little more than 1 percent of Germany’s economy. The United States’ crisis-era spending package amounted to more than 5 percent of its 2009 gross domestic product, albeit with spending that was spread out over several years.

“This is the best available countercyclical tool in Europe,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, wrote in a research note. But he cautioned against expecting too much. “Politics will slow and could jeopardize the move to fiscal stimulus in Germany.”

Mr. Draghi will not make an appearance at the Wyoming meeting this year, though other European Central Bank leaders will be in attendance.

Like Mr. Powell, Mark Carney, governor of the Bank of England, is paying attention to politically created risks. He warned in a recent BBC interview that a no-deal Brexit would create an “instant” shock. The bank had been setting up for potential rate increases, but investors increasingly expect cuts instead as global growth wanes and trade tensions loom large.

In Australia, the central bank has cut rates to record-low levels as the economy weakens and threats to the nation’s 28-year-old expansion loom large. The threats include precarious household consumption, the broader slowdown in Asia.

Politicians in the nation have passed a tax cut and engaged in infrastructure spending, but they are nevertheless headed for what may be their first budget surplus in more than a decade, underlining the limits to that support. Philip Lowe, the head of the Australian central bank, who speaks on Saturday in Jackson, suggested this month that it would be economically helpful if politicians raised unemployment benefit spending, Bloomberg reported — a policy change that the sitting government opposes.

Economic action might be needed sooner rather than later: Recession signals have been flashing in American bond markets, Japan and South Korea are engaging in their own trade war, and consumer and business confidence have taken a hit in many parts of the world. While recession far from guaranteed, it is looking increasingly likely across a number of economies, including the United States.


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