Fed Chairman Powell deserves our pity, not Trump’s scorn

One has to pity Federal Reserve Chairman Jerome Powell. If there is one person who will undeservedly be publicly dragged over the coals by President Trump for the bursting of the stock market bubble, it surely will be him.

Never mind that it was not under Powell’s watch but under that of former Chairpersons Ben Bernanke and Janet Yellen that the very conditions for the stock market bust were set up by overly easy monetary policy for all too many years. 

{mosads}Never mind, too, that it was President Trump, and not Powell, who introduced a large unfunded tax cut that made unavoidable the interest rate hikes that now seem to be bursting the stock market bubble.   

Perhaps, at the start of the year, Powell should have known better than to accept the poisoned chalice that President Trump offered him.

After all, it was not so long ago that soon after being appointed as Fed chairman, Ben Bernanke found out that he would have to clean up the mess of an epic housing bust wrought by years of overly easy monetary policy under Alan Greenspan’s stewardship.

Powell’s long experience as a successful investment banker should have alerted him to the fact that he was being offered the Fed’s reins after an extraordinarily long period of ultra-easy monetary policy that had both artificially boosted asset prices and distorted credit markets.

In particular, he should have been mindful of the fact that the ultra-easy monetary policies of his two immediate predecessors had increased U.S. equity valuations to lofty levels that had only been experienced twice before in the past 100 years. 

It also should not have escaped Powell’s notice that he was being offered the job at a time that it was clear that the Trump administration’s irresponsibly expansive budget policy would highly complicate the Federal Reserve’s task of keeping inflation under control.

In particular, he should have known that the prospective widening of the budget deficit to around 5 percent of GDP at this late stage in the economic cycle would leave the Fed with little choice but to raise interest rates to prevent the economy from overheating. It would have to do so even if that might mean that the stock market bubble would burst.

Perhaps the biggest mistake that Powell made in accepting the Fed job was to underestimate the president’s proclivity to take all of the credit for the good economic news and to freely distribute all of the blame for the bad economic news.

This was all too evident in the first year of his presidency when he took all of the credit for a stock market bump that was more the result of Janet Yellen’s easy monetary policy than of his administration’s economic policy initiatives. 

Now that the stock market is swooning, and if the president’s past behavior is prologue to his future behavior, Powell is about to learn how President Trump will blame him for the Trump stock market slump.

He will do so even though the precipitating trigger for that slump has been higher interest rates that were forced on the Federal Reserve by an overly expansive fiscal policy at the very time that the economy was at full employment.

This is not to say that Powell did not make a mistake on Wednesday when he disappointed the markets by an overly hawkish policy statement that seemed to disregard financial market turbulence and the marked weakening in the international economy.

However, it is to say that if President Trump really wants to find out who is mainly responsible for the current stock market bust, he might look to Ben Bernanke and Janet Yellen and take a long look in the mirror, too.

Desmond Lachman is a resident fellow at the American Enterprise Institute. He was formerly a deputy director in the International Monetary Fund’s Policy Development and Review Department and the chief emerging market economic strategist at Salomon Smith Barney.