Donald Trump takes aim at the Fed once again, but it’s politics, not economics that’s at the forefront of his thinking

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The pointed nuance of President Trump’s Twitter remarks about the Federal Reserve this week may have been lost on those of his followers who aren’t too worried about the specifics of economic policy.

But for those who are, the inference was pretty clear.

President Trump, who is no fool, is laying out his position for the coming economic slowdown.

Yes, markets soared again on renewed optimism about a trade deal with China. And yes, the dollar looks unchallenged as the world’s all-purpose go-to currency.

But even so, there’s no getting away from the salient point: global growth is slowing.

In the case of China, Mr Trump won’t be too worried if the GDP numbers slip somewhat behind the plans laid out by the communist government. But there’s a wider issue too. As the world’s second largest economy, a tailing off of growth from China is bound to have knock-on effects on the rest of the world.

Add that to the mixed picture coming out of Germany, some troubling data from France, Italy’s recession, and the Brexit chaos, and there’s clearly going to be a squeeze on US exports, if it’s not already happening.

Hence Mr Trump’s aggravated attitude towards the Federal Reserve. In Mr Trump’s mind, a key plank of policy should to perpetuate dollar weakness against the global basket of currencies. That way US exports will have a competitive edge in overseas markets, as they will be cheaper.

And so it follows naturally that the impact of any slowing of demand overseas will be mitigated by the increased competitiveness of US goods.

The Fed though was somewhat later to this line of thinking than Mr Trump and, with other policy goals in mind duly raised rates more than once last year, thus making the US dollar a more attractive currency to hold and therefore more expensive in the global markets.

US goods correspondingly became less competitive.

Mr Trump was critical at the time, and it’s an open question amongst commentators and analysts whether that criticism had any bearing on the Fed’s abrupt decision to change tack on rates early this year, to the point where a small minority of people are now even predicting a cut later this year.

The Fed’s official stance is that last year the US economy was in danger of overheating in the context of general global economic strength. US growth had been forecast to outperform overall global economic growth, but overall growth was still healthy.

That’s now changed. It’s now a cliché long-in-the tooth to say that China has a growth rate that any other developed nation would sorely envy, and it still does. But not, perhaps, for much longer.

An article in the South China Morning Post this week speculated that one response may be further interest rate liberalisation in China. But wilder ideas are also doing the rounds. One is that the current governor of the People’s Bank of China, Yi Gang, may end up making his mark on history as the first governor for thirty years who has to co-ordinate a monetary response to a recession.

It’s a different world now, than it was back then, and China’s inexperience both at the administrative and institutional levels at coping with a recession, as well as in the wider country at large, represents a significant potential risk to global stability.

The Eurozone, by contrast, though the economic news there isn’t good, has at least got used to managing recessions and economic hardships. True, the left-wing media in the west has taken alarm at the rise of populism. But actually, that in itself is one of the checks and balances that European culture can bring to bear. If the governing elites aren’t taking sufficient notice of the general populace, out go the governing elites. Quid pro quo.

There’s no option of that kind available in China, hence the apparent willingness of the Chinese to do a deal with Mr Trump’s administration.

Mr Trump knows, though, that it might not be enough. China is unlikely to go into recession any time soon, but even so, the tailing off of the global growth story cannot but rub off on the US. Already, GDP forecasts are slipping to close to 2%, compared to last year’s GDP which rang in at a wholesome 3% or so.

And if the US economy isn’t firing on all cylinders, Mr Trump has got a problem. He promised to make America great again, not just to preside over a country that’s just about getting by. For all those manufacturing jobs he craves to come back to the US, he really will need growth at around the 4% level.

It’s not going to happen though, and he knows it. That’s why the early preparation work has already been done to find a scapegoat. If the Fed hadn’t raised rates in 2018, Mr Trump will say, it could all have been so different, and the US economy could still be roaring away.

Whether he’s right or not isn’t the point. It may just be enough to get him re-elected. And after all, he is first and foremost a politician.