[ad_1]
CHICAGO – President Trump has insulted the Federal Reserve over the last few months, calling it "crazy" and blaming it for any downturn in the stock market or deplorable economic data. But now the president has put the fate of the economy in the hands of the organization – and the man – he has suggested not to trust.
Fed Chairman Jerome H. Powell and other Fed officials have indicated this week that they may be forced to cut interest rates over the coming months to maintain their economic expansion and counteract any economic damage caused by the escalation of Trump's trade war.
Such a gesture would be very unusual. This would happen at a time when the economy was growing rapidly and where inflation and unemployment were low. And it could almost serve as an insurance policy on the impact of the actions taken by the president, which could possibly facilitate its use of tariffs in an unpredictable way.
"The Fed has never had to save the economy from previous presidents 'trade wars, nor policies adopted by the presidents against the advisers' will," said Gary Richardson, professor of economics at the University of California at Irvine, who was previously the official leader. Historian of the Fed.
The Fed is expected to announce its next step at this month's policy meeting and the markets are planning at least three interest rate cuts by the end of the year. Powell said this week at a Fed conference in Chicago that the Fed was ready to take "appropriate" measures to prevent the recession from stabilizing, resulting in a sharp rise in equities.
The Fed could cut rates this month or at political meetings in July, September, October and December. Joseph LaVorgna, an economist at the investment bank Natixis, said in a research note Thursday that "the Fed has never disappointed the call to action markets."
The new trajectory is a sudden change from the direction of the Fed and presents risks, regardless of the direction taken.
The Fed controls its economy tremendously by controlling a benchmark interest rate that influences virtually all loans – from mortgage loans to business loans.
As recently as last year, the central bank has embarked on a campaign to increase interest rates aimed at preventing the overheating of the economy and preventing the Inflation out of bounds.
Earlier this year, the Fed suspended these interest rate hikes due to the expected slowdown in the economy, in part because of the trade conflict with China.
Further interest rate cuts could extend an economy that entered this month in its 10th year of expansion. This is important because many Americans have only recently begun to see the benefits of this economy in the form of healthy wage increases.
"The logic of the Fed is that when interest rates are so close to zero, you can not wait for the markets to melt. We must act early to avoid this, "said Julia Coronado, president of MacroPolicy Perspectives and former Fed economist.
However, efforts to stimulate future growth also include a range of potential disadvantages.
Interest rates, which were almost zero for years after the 2008 financial crisis, have only risen to about 2.5%. If the Fed started reducing them now, it would have little room for maneuver if the economy went into a significant slowdown.
The Fed made similar cuts in a healthy economy in 1995. But at that time, interest rates were 6%, leaving it free to take additional measures if the economy deteriorated.
Questions about the Fed's stance have taken on a new urgency since Trump deepened his trade war with China last month. Trump complained about the pace of trade negotiations with Beijing and announced that it would subject more Chinese products to a 25% tariff and would eventually place all Chinese products under tariff.
Then last week, Trump reinforced the situation by announcing its intention to subject Mexico to tariff escalation on Monday, because of its failures in the fight against illegal migration to the United States.
Although the trade war has so far had no major impact on the economy, economists believe that the combination of these actions could have much more significant effects. And recent economic data suggests that Trump's trade-distorting approach is starting to have an amplified effect on the economy, particularly in the manufacturing sector.
The fast-paced events also put Powell and the central bank – who have always favored independence from politics – in an uncomfortable position.
Trump appointed Powell to the leadership position of the Fed and took office early last year. But since then, the president has repeatedly criticized him, even going so far as to say that he regretted having appointed him to the highest position at the central bank and seeking his position. He could return Powell in December.
Trump urged Powell to lower interest rates, but the central bank reacted by saying that a strong economy with an unemployment rate below 4% does not need help from low rates.
Now, in an unexpected turn, Trump could get his wish, partly because he's taking other measures that are slowing growth.
Tim Duy, professor of economics at the University of Oregon and head of the Fed Watch website, said the Fed's problem could arise if it reduced its rates. Interest quickly and that the trade war would subside with little impact on growth.
"They would like to be ahead of any impact, but what if it turns out to be a lot of noise for nothing?" Said Duy.
Economists – and many GOP lawmakers – are keen to say that Trump's tariffs actually represent tax increases for US consumers and businesses. Trump says the tariffs bring China, Mexico and other countries to the negotiating table in a way that has never happened before.
If Trump applies tariffs on all Mexican imports in the coming days, the cost for a typical family of four would rise to more than $ 1,000 a year, according to calculations by the Foundation of the United States. Tax, a straight, virtually canceling the benefits of the 2017 edition. Tax legislation pushed by Trump and congressional Republicans.
Increasing tariffs on China or Mexico even more, as Trump threatened, could result in a net increase in the tax for some Americans by the president, the foundation said.
Most economists outside the White House predict a slowdown in the economy this year as tax cuts and additional government spending begin to fade, but there is reason to fear that Trump's commercial approach does turn a modest downturn into something more dramatic.
If the Fed cut rates to counter Trump's trade war, it could extend the current recovery, but it could also trigger bubbles and almost certainly leave the Fed with less ammunition to deal with the next slowdown.
"By doing all that is necessary to maintain the expansion, the Fed is likely to further inflate the price of assets," wrote James Dorn, vice president of monetary studies at the institute libertarian Cato.
Dorn warns that quick action by the Fed would "further politicize monetary policy" and could possibly prompt Trump to raise rates if he knew the Fed would help cancel the worst of the damage economic.
Powell recently stated on CBS '"60 Minutes" show that there was "no reason" that the economy could continue to grow for years. But if he can realize that this ambition becomes more and more difficult to know.
[ad_2]
Source link