Fed's Powell vs. Trump: who's got a 'feel' for markets now?

By Ann Saphir and Trevor Hunnicutt

JACKSON HOLE, Wyo. (Reuters) - Donald Trump once accused the Federal Reserve of not having a "feel" for the market and compared Federal Reserve Chair Jerome Powell to a golfer who can't putt, but on Friday it was the U.S. president that drove markets into the rough.

Investors had anxiously awaited Powell's speech on Friday, but his continued pledge to "act as appropriate" to sustain the U.S. economic expansion generated only tepid financial market reaction.

Instead, it was Trump who threw markets for a loop, sending the Dow down more than 600 points after he said he was ordering Americans to look for alternatives to doing business in China. After U.S. stock markets closed, Trump responded to new Chinese tariffs on U.S. imports with another increase in U.S. tariffs on Chinese goods.

Powell has been under the intense glare of markets for months, accused of a few communications missteps as the Fed shifted from raising rates last year, to pausing and, last month, to cutting rates for the first time in more than a decade.

Still, until recently, the Fed's communications were rated consistently better under Powell than under predecessors Ben Bernanke and Janet Yellen by banks that trade directly with the central bank. That's based on their responses to regular surveys by the New York Fed, shared with Fed officials before their regular meetings.

The latest survey, released this week, showed those traders sharply docked the Fed's grades last month for what they viewed as inconsistent and confusing messaging ahead of the Fed's first rate cut in more than a decade.

For a graphic, please see https://fingfx.thomsonreuters.com/gfx/editorcharts/USA-FED-REPORTCARD/0H001PBPY5V1/index.html

Powell's speech https://www.federalreserve.gov/newsevents/speech/powell20190823a.htm at the annual Fed retreat in Jackson Hole, Wyoming, a methodical walk through Fed history and its successes and failures, caused less confusion.

"The headlines seem consistent with a central banker attentive to the risk and prepared to do more to support the expansion and do whatever it takes to underwrite a continuing recovery," said Richard Franulovich, head of currency strategy at Westpac. "I don't think that's particularly new or innovative."

Trump, by contrast, was blunt in his call for Fed policymakers to work with him in his efforts to wring a better trade deal from China's Xi Jinping, asking whether Powell or Xi were "our" bigger enemy.

"It is incredible that they (Fed officials) can 'speak' without knowing or asking what I am doing, which will be announced shortly," Trump said before telling U.S. companies they are "ordered" to find alternatives to doing business in China.

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"This is a clear sign of an escalation of a trade war," said Subadra Rajappa, head of U.S. rates strategy at Societe Generale (PA:SOGN) in New York. "That's really what the market's responding to."

Of course, Powell is not out of the woods, with a tough communications challenge ahead. The trade war has made the outlook for the U.S. economy increasingly spotty. And bond markets point to an increasingly dire outlook for U.S. growth and inflation.

Powell also will have to coherently explain the policies of a rate-setting committee divided between those who want to cut rates aggressively now and those who want to wait for more evidence of a recession.

Still, it was Trump's day to be in the market's unforgiving glare. And the U.S. president, who has in turns dismissed or downplayed the costs of a trade war with China, sounded amused that the market selloff was being attributed to his policies.

On Twitter, he said that the Dow's decline might be due to U.S. Representative Seth Moulton, "whoever that may be," dropping a long-shot bid for the 2020 Democratic presidential nomination on the same day.