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Central Bankers Worry About Trump's Tactics to Reorder Global Trade -- Update

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08/25/2019 | 04:29pm EDT

By Nick Timiraos

JACKSON HOLE, Wyo. -- The world's central bankers are increasingly worried that President Trump's tactics to reorder global trade are destabilizing economies in ways that they can't easily fix.

Gloom filled the atmosphere in the Jackson Lake Lodge, where central bankers and academic economists from around the world gather every August, because with borrowing costs already low, the Federal Reserve and other central banks have less room to cut rates to spur growth.

"We are experiencing a series of major political shocks," said Reserve Bank of Australia Gov. Philip Lowe at the concluding panel Saturday. "And those political shocks are turning into economic shocks."

Rising uncertainty over trade policy adds to a growing list of geopolitical tensions, including protests in Hong Kong, Britain's threat to crash out of the European Union on Oct. 31, a political crisis in Italy that could roil the euro, conflicts between Japan and South Korea, and India's military lockdown in the Kashmir region bordering Pakistan.

But central bankers made clear they see President Trump's mercurial trade policy as the biggest of these threats.

"I've never seen the world so synchronized and so globally spooked about something that initially hadn't even happened," said Adrian Orr, the head of New Zealand's central bank, in an interview Friday. "You get nervous that you're in this boiled frog situation where things slowly come to the boil, and then you discover that [growth] is permanently lower."

Mark Carney, governor of the Bank of England, said the scale of the trade war was already chilling global manufacturing and business investment. "It is a trade war," he said in an interview. "Certainly, the U.S. is involved in the theaters -- all of the theaters -- in this war."

Fed officials have been very reluctant criticize Mr. Trump's trade policies, but others were outspoken. After Mr. Carney's luncheon address outlined broader shortcomings in the international monetary system, former Fed vice chairman Stanley Fischer responded bluntly. "The problem is not in the [international monetary system]. It is in the president of the United States," he said. "It's not a service to anybody at least privately to not focus on what the key problems are."

Officials said they hoped world leaders gathered 5,000 miles away, at the G-7 summit in Biarritz, France, would heed recent ominous signals of rising recession risks.

Central bankers said they feared political leaders were inflicting avoidable pain on the economy with little to show for it. "To some extent, it's not necessary," said Øystein Olsen, Norway's central bank governor.

Dallas Fed President Robert Kaplan, in an interview Thursday, warned that central banks' tools aren't well-suited to deal with the political sources of economic weakness. "Monetary policy probably wasn't creating the slowdown, and it probably can't, by itself, arrest this slowdown that's going to intensify," he said.

The Fed lowered its benchmark rate last month to a range between 2% and 2.25%. The quarter-percentage-point cut was its first in more than a decade.

One concern is that after decades of monetary stimulus, lower rates may buoy asset prices but won't otherwise remove the uncertainty holding back investment.

Businesses "are asking questions about whether they should even be investing," said Lesetja Kganyago, governor of the South African Reserve Bank. "So you could scream at the central banks all you like, but the truth of the matter is with ultralow interest rates, corporates are still not investing."

While employment growth has held steady, policy makers said they feared it was only a matter of time before an investment chill would lead to hiring cutbacks.

"When you're uncertain, what do you do? You sit on your hands," said Australia's Mr. Lowe. "It wouldn't take too much for businesses to decide not to invest and not to hire people."

A dizzying series of events in Washington and Beijing on Friday illustrated these worries -- and kept officials here constantly refreshing news alerts on their smartphones. They woke up to news that China would impose next month new tariffs on U.S. goods in retaliation for recently announced countermeasures by the White House.

Markets briefly recovered early losses after Fed Chairman Jerome Powell said the Fed would "act as appropriate" to sustain the expansion. But they plunged shortly after, when Mr. Trump issued a warning to U.S. businesses to make preparations for leaving China.

Then, after the Dow Jones Industrial Average closed down nearly 2.4% Friday, Mr. Trump announced he was increasing tariffs. The White House said Sunday morning he regretted not raising them more.

"The world is watching the U.S. with real concern because of the rapid nature and change of policy," said Mr. Orr, who led New Zealand's central bank to a surprise half-point rate cut earlier this month to pre-empt a broader slowdown.

Worries about Washington's increasingly unpredictable role in international finance also fueled talk about how long the dollar's status as the global reserve currency would continue.

On the sidelines of the event, many officials were left speechless by Mr. Trump's escalating rhetorical attack on Mr. Powell, whom the president picked to serve a four-year term beginning last year. Unhappy that Mr. Powell didn't signal aggressive stimulus on Friday, Mr. Trump suggested on Twitter that the Fed chief was an enemy of the state.

"There is this rise of populism, and central banks are like the lightning rod," said Mr. Kganyago, whose bank is under growing pressure from some South African political leaders to play a bigger role in the economy. "Attacks on the Fed should not be seen in isolation." He said the Fed's response has been "commendable."

After being pressed to serve as first responders to economic emergencies since the 2008 financial crisis, central bankers worry they now face greater risks -- one from disappointing the public, fueling more threats to their independence, and another from overrelying on stimulus that might do more to lift asset prices, possibly leading to bubbles, than generate stronger underlying growth.

In Europe and Australia, officials have pressed politicians to boost spending and lift consumption to ease recession worries.

"Globally, monetary policy is carrying too much of the burden, and that's probably at a time monetary policy is not the best lever to dealing with the shocks that we're facing," said Australia's Mr. Lowe. "We just risk pushing up asset prices."

Australia cut its policy rate to a record low last month amid rising threats to its record 28-year-old expansion. The central bank has recommended political leaders increase spending on unemployment benefits but has met resistance.

"We have a lot riding on trying to unstick these other policy levers," said Mr. Lowe. "Otherwise we're going to continue to feel the weight on our shoulders."

Write to Nick Timiraos at nick.timiraos@wsj.com

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