Trade wars and ‘Trump taxes’ increase the risk of recession

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If the U.S. economy is really the “best economy ever” as Trump likes to claim, why did the Fed just lower interest rates for the first time since 2008 in the throes of the Great Recession in order to juice the economy? The Fed cut rates for the first time since 2008:

The Federal Reserve on Wednesday lowered interest rates for the first time since the Great Recession in 2008 to help stave off the possibility of an economic downturn.

Policymakers led by Fed Chairman Jerome Powell voted 8-2 in favor of a small cut in the federal funds rate, and recommitted to their promise to “act as appropriate” to sustain the country’s longest economic expansion in history.

Interest rates, which affect the cost of borrowing for credit cards and mortgages, are now set to hover between 2% and 2.25%.

The rate cut follows months of pressure from President Donald Trump, who has broken with his predecessors’ practice of walling off the central bank from politics.

The central bank is hoping a rate cut will be the necessary injection to keep the US economy healthy, especially because it has limited ammunition to respond to a downturn with historically low interest rates.

The Fed also announced plans to end the reduction of its $3.8 trillion asset portfolio, effective August 1, two months earlier than previously expected. The runoff was set to end after September.

Federal Reserve Board Chair Jerome H. Powell may not have wanted to cut interest rates. But in the end, President Trump appears to have given him no choice. How the Fed’s interest-rate cut helps Trump wage his trade war:

Amid increasing signs that the global economy is slowing, Powell on Wednesday announced a quarter percentage point reduction in the cost of money.

The move represented an about-face for Powell, who only last year steered the Fed through four interest-rate increases, citing the economy’s strength. But he attributed the cut to a global growth slowdown that has been caused in large part by Trump’s confrontational approach to trade [i.e., tariffs and trade wars that are actually “Trump taxes” on the American consumer.]

Now, Powell — merely by fulfilling the Fed’s traditional role — is in effect enabling Trump to pursue his trade strategy without facing the full consequences at home.

“Powell’s in this extremely difficult situation,” said Michael Strain, a former research economist at the Federal Reserve Bank of New York. “He doesn’t want to compromise the Fed’s political independence because the president is badgering him to cut. At the same time, the trade war is a reality of the U.S. economy and the global economy, and the Fed has to be responsive to those realities.”

Eighteen months of on-again, off-again tariffs — and tariff threats — against products from China, India, Mexico, Canada, the European Union, South Korea, Japan, Vietnam and Guatemala have taken a toll on business confidence.

Caught in the crossfire, global manufacturers have been weakening for months. U.S. business investment in the second quarter fell 0.6 percent, the worst performance in more than three years.

Uncertainty caused by the president’s “America First” trade policies — perhaps the greatest threat to the record U.S. economic expansion — was a chief spur to Wednesday’s rate cut, Powell told reporters.

“Weak global growth and trade tensions are having an effect on the U.S. economy,” he said. “You see weak investment. You see weak manufacturing.

So what did Trump do in response? What else, another tweet. Donald Trump admitted in a tweet today that his negotiations with China have gone nowhere, his promised deal in which China was going to buy more U.S. farm products never existed, and in a month he plans to increase the tariffs on China to cover another $300 billion worth of goods.

The surprise tariffs President Donald Trump announced by tweet on Thursday against $300 billion or so of Chinese goods takes the trade dispute between the two countries to a new level. Trump’s latest broadside on China raises fear that the trade war is the ‘new status quo’:

The president’s announcement jolted markets, which had bounced back sharply off Wednesday’s disappointing Fed rate cut only to have their legs cut out from underneath by news of a heightened trade war.

Trump’s move means that all Chinese goods entering the U.S. will be subject to some sort of duties. While the actual price tag of the latest action is technically just $30 billion, or about 0.14 percentage points of GDP, the psychological damage that could be inflicted comes at an inopportune time.

“The direct impact of these tariffs is smaller than a bread box,” said Bill Adams, senior economist at PNC. “The larger effect is going to be through confidence channels and the effect on capital spending.”

Indeed, if business surveys have been clear about anything it’s that American business is nervous about trade. The closely watched Institute of Supply Management manufacturing survey dipped again in July and is teetering on contraction territory, while the Federal Reserve’s key manufacturing gauge has fallen for consecutive quarters.

Morgan Stanley strategists said the latest round of tariffs, if implemented, would contribute to “slowbalization,” or a continuation of lackluster growth, and could hasten a U.S. recession in as soon as three quarters.

“One key reason: about 68% of the next goods tariffed will be consumer goods and autos/parts, with more potential for immediate impact to the economy,” Morgan Stanley strategist Michael Zezas said in a note.

A further reminder came in last week’s GDP report.

The economy rose 2.1% in the second quarter, but the internals showed clear tariff impact. Exports slumped 5.2% for the quarter and nonresidential investment, a key metric for business spending, dropped 0.6% for its worst showing since early 2016.

With Thursday’s news of a trade escalation comes another sign that the tariff issue is unlikely to go away soon.

“Tariffs are affecting the part of the U.S. economy that is most integrated into world trade,” Adams said. “This latest increase in tariffs increases the likelihood that higher trade barriers are the new status quo.”

As for more specific impacts, Adams sees the tariffs raising inflation and lowering disposable income, which increased just 2.5% in the second quarter, its lowest rise in nearly two years.

Inflation could hit sectors such as electronics, clothing, footware and toys and be a credit hit to companies in those sectors along with manufacturing, and apparel and leather, according to Moody’s Investors Service, a credit rating firm. Other sectors that face impact as the trade war escalates include crude oil, transport equipment and semiconductors.

Retaliation from China could come in a number of forms, including tariffs on U.S. goods and pressure on American companies operating there.

“The escalation of trade tensions will increasingly weigh on the global economy and supply chains in an environment of already decelerating growth in the US, the euro area and China,” Elena Duggar, Moody’s associate managing director, said in a statement. “Uncertainty will dampen business investment and trade flows.”

President Trump’s threats of a new round of tariffs on $300 billion in Chinese goods increases the chances the U.S. economy could head into recession. Trump tariff threat pushes up chance for Fed rate cuts as recession risks rise:

The president’s tweet came a day after he expressed his dissatisfaction with the Fed’s quarter point rate cut, saying that Fed Chairman Jerome Powell “let us down.”

Before Trump’s midafternoon tweet, the Dow was up more than 250 points Thursday and bond yields were lower on expectations that the Fed would have to cut rates more than Powell suggested during his press briefing Wednesday. The Fed cut rates by a quarter point in its first rate cut in more than a decade but disappointed markets by not signalling much more of a reduction.

Trump’s tweet sent stocks spiraling and the 250 point gain turned into a more than 280 point loss for the Dow at the closing bell. In a flight to quality trade, investors dove into bonds, driving yields sharply lower. The 10-year yield, which moves opposite price, dipped to a 2016 low of 1.87% from a high of 2.05% early in the day.

“If he follows through on that threat, that is the fodder for recessions,” said Mark Zandi, chief economist at Moody’s Analytics. “Recession odds probably go over even, and I think it would be pretty hard to avoid a downturn, regardless of what the Fed does.The Fed will have to respond and the Fed will have to cut rates. The bond market will get what it is anticipating, and that is four rate cuts.”

The new tariffs, according to Trump’s tweet, would go into affect Sept. 1 and would be 10% on $300 billion in goods, on top of the 25% on $250 billion already in place.

Trump later said, on the White House lawn, that he could raise tariff even more, and put 25% tariffs on the $300 billion in goods. He said China President Xi Jinping says he wants a deal but is not moving fast enough.

Trump said his negotiating team returned from talks this week in China and said discussions would resume in September.

“Until such time as there’s a deal, we’ll be taxing them,” said Trump.

WRONG. Tariffs are “Trump taxes” on the American consumer – you will pay it.

The tariff threat amplified concerns. “It is a growth negative impulse, which incrementally raises the chance of a recession. It raises business uncertainty. Powell was very clear that the biggest threat to the U.S. economic outlook was the trade war, and it just got deepened,” said Jon Hill, rate strategist at BMO. “It makes sense the probability of a recession just went up similarly. That’s the reason why the probability of a Fed rate cut just went up. The Fed will cut again to extend the economic cycle and avert a recession.”

This is economic malpractice.




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