Powell: Fed Has No Playbook for Trump's Trade War

Then he couldn't resist a potshot, comparing the Fed chief with President Xi Jinping of China.

Powell did somewhat push back against Trump, in a telling passage about how much he and other policy makers are struggling to get their hands around his trade policy. Remember the context here — the Fed cut interest rates for the first time in more than a decade on July 31, and a day later, Trump announced additional tariffs on Chinese goods and sent markets into a tizzy.

He wasted even less time on Friday, declaring on Twitter "I will be responding to China's Tariffs this afternoon." Here's the central bank's thinking about trade in its entirety:

"We have much experience in addressing typical macroeconomic developments under this framework. But fitting trade policy uncertainty into this framework is a new challenge. Setting trade policy is the business of Congress and the Administration, not that of the Fed. Our assignment is to use monetary policy to foster our statutory goals. In principle, anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy. There are, however, no recent precedents to guide any policy response to the current situation. Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade. We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives."

All told, though, it comes off as rather meek, and an implicit acknowledgment that the central bank will err on the side of easing as long as trade tensions remain heated. "It will at times be appropriate for us to tilt policy one way or the other because of prominent risks," Powell said.

Further interest-rate cuts are not a consensus view. Regional Fed presidents including Boston's Eric Rosengren, Kansas City's Esther George, Philadelphia's Patrick Harker, Dallas' Robert Kaplan and Cleveland's Loretta Mester all expressed stronger reluctance to further easy monetary policy, given their respective views of the U.S. economy.

Powell is going to have to bridge the divide between that contingent and those who side more with St. Louis Fed President James Bullard. He said on Friday that he expects a "robust debate" on a half-point rate cut among the Federal Open Market Committee voters, adding that "our job is to get the yield curve uninverted."

At least for today, it's mission accomplished. The yield curve from two to 10 years, which closed with a negative spread on Thursday for the first time since 2007, is back to positive as short-term yields fell the most on renewed expectations for persistent Fed easing.

Ahead of Powell's remarks, Kaplan commented that he was open to cutting interest rates, but he'd prefer not to. I'd wager that's Powell's line of thinking as well. But clearly, he feels the Trump administration's policies have boxed him in. The path forward, as long as the U.S.-China trade war wages on, appears to be ever-lower interest rates.

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