A reduction in Fed rates will not save Wall Street for three reasons

While President Donald Trump's trade wars are stirring up investors, Wall Street is seeking security coverage: further rate cuts by the US Federal Reserve to offset economic damage.

But seasoned economists from both political parties believe that this may not work properly, even if the Fed says yes, for three reasons. And that poses a risk to the recovery of America, which has lasted for a decade, in the run-up to the 2020 presidential election.

The first is that tariffs and tariff threats have shaken the confidence of trading partners and companies, as evidenced by the CEO's economic outlook index of the second quarter of the Business Roundtable. Stimulating demand through Fed rate cuts can counter the effects of shrinking tariff costs, but not damage to animal spirits in US firms.

Monetary policy can "modestly help" but "is not an ideal tool," says Glenn Hubbard, dean of Columbia University's Graduate School of Business. "This negative effect resulting from policy uncertainty is likely to persist even as current disputes with China and Mexico are resolved.This uncertainty weakens some of the investment gains made possible by the reform of the economy. 39, corporate tax. "

The second, more concrete, reason is the actual disruption of existing business models. Trump boasts that its tariffs have imposed a price on China by forcing companies to leave, but it also imposes costs on these companies.

"There are significant supply-side effects related to the break-up of global supply chains that can not be solved by monetary policy," notes Greg Mankiw of Harvard. Like Hubbard, Mankiw has already been the chief economic advisor to President George W. Bush.

The third reason is late in timing. The price-driven economic bug can set in before the Fed's drug starts to work.

"The rate cuts take about 12 months to make a substantial impact," said Jason Furman, chairman of the board of economic advisers to President Obama. "Rates could be much faster, which could pose a real problem for the economy in the second half of 2019."

Economists were expecting a slowdown in 2019 even before Trump declared himself "fare man" last December and began to prove it. After a wave of revival of GOP tax cuts at the end of 2017, growth slowed in the last months of 2018 and remained below expectations of 3% or more set by the government. administration for the entire exercise.

The surprising growth of 3.1% compared to the first quarter of 2019, due in part to the accumulation of stocks, gave hope for a more robust year. But employment growth has declined, with forecasters forecasting growth of 2% or less in the second and third quarters of 2019.

"The question is whether there is a natural settlement of the business cycle … or if trade wars have devastating effects on the economy," Betsey Stevenson observes. another former Obama advisor. "I tend to think that there is evidence that this is happening."

The result is growing fears that the economy will not grow more slowly but will shrink. The chief economist of Vanguard has increased this week's recession chances in the next 12 to 18 months, bringing them up to 40%, up from 30% previously.

"The economy is on the razor's edge," says Mark Zandi of Moody's Analytics. "Growth has slowed considerably compared to last year and is about to slow down, and this will be the case if the president does not withdraw soon."

Douglas Holtz-Eakin, former head of the Congressional Budget Office, describes the trade war as "damaging", but still considers it "premature" for the Fed to act. Cutting rates now to offset Trump's tariffs would reduce the central bank's room for maneuver to respond to a more troubling setback such as a global energy price shock or a debt crisis.

"The idea that there is only margin left for the Fed to relax its policy if something else goes south," warns Justin Wolfers, Democratic economist at the University of New York. Michigan, "should be terrifying".