The SPDR S&P 500 ETF Trust (NYSE: SPY) is down more than 2% so far in the month of August after President Donald Trump threatened to impose new 10% tariffs on $300 billion worth of Chinese imports not already covered under the existing tariffs.
In retaliation, China has halted all purchases of U.S. agricultural products and has allowed the yuan to devalue to 10-year lows against the U.S. dollar to offset the impact of the tariffs.
Trump Blames Fed
Trump again took to Twitter on Thursday morning, blaming the Federal Reserve for what he says is an unfair competitive landscape for U.S. businesses.
Despite the Federal Reserve cutting interest rates by 0.25% on July 31, Trump said Thursday American companies like Caterpillar Inc. (NYSE: CAT), Boeing Co (NYSE: BA) and Deere & Company (NYSE: DE) can’t compete internationally when the Federal Reserve is keeping interest rates and the value of the dollar high.
“We have the greatest companies...in the world, there is nobody even close, but unfortunately the same cannot be said of our Federal Reserve,” Trump tweeted, adding that “substantial Fed cuts” would make it possible for American companies “to win against any competition.”
As your President, one would think that I would be thrilled with our very strong dollar. I am not! The Fed’s high interest rate level, in comparison to other countries, is keeping the dollar high, making it more difficult for our great manufacturers like Caterpillar, Boeing,.....
— Donald J. Trump (@realDonaldTrump) August 8, 2019
Role Of Rate Cuts
Historically, the Federal Reserve has typically only issued interest rate cuts during periods of U.S. economic contraction. Yet despite 16.6% year-to-date gains for U.S. stocks, GDP growth exceeding expectations at 2.1% in the second quarter and interest rates well below previous bull market peaks, the Fed opted to cut rates in July for the first time since 2008. Interest rate cuts have historically been the Federal Reserve’s first line of defense against a U.S. recession, while rate hikes are a guard against out-of-control inflation.
“They have called it wrong at every step of the way, and we are still winning,” Trump said of the Fed. “Can you imagine what would happen if they actually called it right?”
Fed Chair Jerome Powell has been under fire from the White House ever since Trump appointed him in November 2017.
Former Chairs Respond
Trump’s unprecedented attacks on the Fed prompted former Fed chairs Paul Volcker, Alan Greenspan, Ben Bernanke and Janet Yellen to co-write an op-ed piece for the Wall Street Journal this week highlighting the importance of an independent central bank. Together the four chairs served 40 years at the position of Fed chair and were appointed and reappointed by both Democratic and Republican presidents.
“As former chairs of the board of governors of the Federal Reserve System, we are united in the conviction that the Fed and its chair must be permitted to act independently and in the best interests of the economy, free of short-term political pressures and, in particular, without the threat of removal or demotion of Fed leaders for political reasons,” the former chairs wrote.
The market initially reacted positively to Trump’s calls for more rate cuts. The SPY ETF was higher by 1.37% in mid-day trading, and each of the stocks Trump mentioned traded higher following his tweets. The iShares FTSE/Xinhua China 25 Index (NYSE: FXI) also traded higher by 0.5% on Thursday, while the SPDR Gold Trust (NYSE: GLD) was up just 0.2% on the day.
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