Fed hikes may ease if Trump turmoil heats up

WHEN

Federal Reserve Chairman Jerome Powell speaks Friday at the annual Jackson Hole, Wyo., soirée, he’ll have lots of things on his mind.

Some things he’ll probably speak about; others he definitely won’t. And there is at least one that Powell probably hasn’t thought much about yet — but should. No. 1 on the list: President

Trump’s recent attacks on Powell’s decisions to keep raising interest rates. The issue of rate hikes will definitely be front and center in Powell’s talk — but don’t look for them to include Trump’s sudden, vehement opposition to increased borrowing costs.

In a previous column, I explained that it’s not unprecedented for the Fed boss to butt heads with the president. It just hasn’t happened in recent memory because Fed chiefs have mainly been lap dogs for Washington and Wall Street.

Powell doesn’t seem to be sitting on anyone’s lap or doing any fetching for the moneyed class. Trump thought he hired a gentle, well-behaved puppy. Don’t look now, but “puppy” Powell, untrained in Washington politics, just peed all over Trump’s leg.

Undoubtedly, Powell will speak at Jackson Hole about the economy looking good. That’s something that, ordinarily, Trump would be proud of. The only problem is the good health of the economy — and there’s no guarantee how long it will stay that way — is a big problem for the Fed.

With the federal government borrowing so much to cover its deficit, Powell has to be very concerned that even a slightly overheated economy could drive inflation much higher than it already is and higher than the Fed finds acceptable.

The Fed left rates unchanged at its last meeting, but discussions on July 31 and Aug. 1 — released in minutes on Wednesday — made it clear Powell and co. are considering another rate hike soon. The Fed has raised rates twice this year and is widely expected to tighten policy again next month.

Powell will want to accentuate equities, of course. The bull market — by certain measures — is a decade old. And I don’t know anyone who follows this stuff who would argue with the fact that Wall Street has benefited greatly from the Fed’s easy monetary policy.

In fact, the Fed’s actions have been the one driving force for the market over the past 10 years.

“Don’t fight the Fed” is the Wall Street adage. That means buy stocks when the Fed is pumping money. But it also means don’t buy when the Fed is tightening, as it is these days.

Powell won’t make a stock market prediction while in Wyoming, the so-called Equality State, that’s for sure. But deep down he can’t help but wonder whether his rate hikes will make him the villain — with Trump leading the charge — if the stock market falls.

If Powell decides to get aggressive in Friday’s talk, he might say something about trade wars — and the president won’t like that. Powell might tell attendees that companies are already complaining that Trump’s trade wars are hurting business, but he certainly won’t mention the president by name.

But Powell could carry that thought one step further by adding if the trade wars do cause an economic slowdown, then rates hikes, which are intended to slow things down, might not be needed any longer.

And then there are these concerns: the effect of massive levels of student debt on the economy; a slowdown in the housing market; and rising health care costs. For sure, Powell won’t have to fill any time in his talk cracking jokes. Those topics alone will have the audience doubling over — in pain.

There’s one other thing that Powell is certainly aware of, but it, too, won’t come up in Jackson Hole.

Back in the late 1990s, then-Fed Chairman Alan Greenspan needed to cut interest rates because of the chaos that Bill Clinton’s impeachment saga caused. Those rate cuts came despite the fact that the economy was doing well.

Greenspan’s action was a diversion. America feared that the political crisis would destroy faith in the country, hurt the economy and beat up the markets.

The current political situation could get a lot worse going into the midterms. On Tuesday, Trump got dinged when his former lawyer accused him of knowing about a payoff to two former paramours.

That’s not going to get Trump impeached. It’s small stuff. But if any- thing substantial does come up — concocted by overzealous prosecutors or not — the Fed may have to come to the economy’s rescue again by reversing course and cutting rates. Just as Greenspan did. Is the chaos in Washington going to increase to the extent that Trump presidency seems in jeopardy? Is Wall Street going to have to worry that the stock market will lose its favorite president? It’s very possible. Here’s why. The Democrats know there is a report coming from the Justice Department’s Office of the Inspector General that is said to give the details of the dirty tricks played on the Trump campaign. That report, along with probes by various congressional committees, could also hurt US intelligence communities and possibly show certain higher-ups were aiding the Democrats. What I’m saying is the additional rate hikes expected from the Fed may not happen if the political seas get too rough. But that’s for later in the year. On Friday, Powell won’t be talking about politics — but it can’t be too far from the top of his worry list.