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Trump Lines Up Powell as Scapegoat If Tax and Trade Moves Sour

President Donald Trump looks to be lining up Federal Reserve Chairman Jerome Powell to be the fall guy if the president’s trade and tax policies don’t succeed.

In a series of comments over the past two days that shook financial markets, Trump attacked the Fed for raising interest rates and for undercutting his efforts to slash the U.S. trade deficit.

“He is just setting up someone else to blame if things don’t go according to his plan,” said Mark Spindel, founder and chief investment officer of Potomac River Capital LLC in Washington.

The Fed has raised rates five times since Trump took office in January 2017 and has provisionally penciled in two more increases for this year. It’s also scaling back the support it’s providing the economy by gradually reducing its holdings of Treasury and mortgage-backed bonds.

Tightening ‘Hurts’

As authorities in Japan and Europe hold rates near zero, investors have pushed up the value of the dollar against the yen and euro. That’s made American products less competitive. Trump indicated he thinks that’s unfair.

“The United States should not be penalized because we are doing so well,” Trump tweeted on Friday. “Tightening now hurts all that we’ve done.”

The president, who’s launched tariff battles with most of America’s major trading partners, also lashed out at China and Europe for keeping their currencies weak in order to gain an edge for their exporters.

Treasury Secretary Steven Mnuchin defended Trump on Saturday, telling reporters on the sidelines of the G-20 finance ministers meeting in Buenos Aires that the president fully supports the independence of the central bank, and also isn’t trying to interfere in the currency market.

Much of Trump’s ire with the Fed seems directed at the impact that the central bank’s interest rate increases have had on the dollar. Despite swooning on Friday in response to Trump’s currency comments, the greenback is about 5 percent higher than it was when Trump imposed tariffs on steel and aluminum imports on March 23.

Trump’s budget director Mick Mulvaney separately took the Fed to task for allegedly not recognizing that the president’s policies can allow the economy grow faster without spurring inflation.

“Every time things seem to start getting a lot better, the Fed pumps the brakes,” he told Fox News on Friday.

The president’s comments shift attention during a week when he’s facing growing pressure over his relationship with Russian President Vladimir Putin, after the two leaders met on Monday in Helsinki. Trump came under fire for his lukewarm support during a news conference with Putin for the finding by U.S. intelligence agencies that Russia meddled in the 2016 election.

It’s not that unusual for politicians to blame the Fed when things go wrong with the economy. Trump’s outburst, though, comes at a time when the economy is “in a really good place,” according to Powell.

The unemployment rate under Trump has fallen to 4 percent, from 4.8 percent the month he was sworn in, and some economists predict gross domestic product last quarter expanded by about 4 percent — double the pace in the first three months of the year. The Commerce Department’s first estimate for second-quarter GDP is scheduled for release on Friday.

Trump told CNBC in an interview broadcast on Thursday that he was “not thrilled” with the Fed over rate hikes.

“I am not happy about it,” the president said. “But at the same time I’m letting them do what they feel is best.” Trump also called Powell, who he appointed to succeed Janet Yellen, “a very good man.”

Powell declined to comment when approached by a reporter in Buenos Aires, as he prepared for weekend meetings with finance ministers and central bankers from the Group of 20 economies.

The president is limited in how much direct pressure he can put on the Fed chief. Nominated by Trump and confirmed by the Senate with broad bipartisan support, Powell has a four-year term as chairman that ends in 2022. According to the Federal Reserve Act, a Fed chairman, or any Fed governor, can only be removed from office before his or her term ends “for cause,” which isn’t defined.

The president’s attacks on the Fed’s rate increases and the recent strengthening of the dollar highlight an inherent contradiction at the core of his economic policies.

While he’s trying to bring down the U.S. trade deficit by slapping tariffs on imports, his tax cuts are boosting the federal government’s red ink, putting upward pressure on interest rates and the dollar.

“This underscores the inconsistency in these policies,” said Joachim Fels, global economic adviser at Pacific Investment Management Co. in Newport Beach, California.

And it leaves Powell and the Fed vulnerable should they go awry.