Fed is about to cut rates, is Trump the reason of all this?

For a long time, US President Donald Trump’s calls have put the Federal Reserve under pressure for a lighter monetary policy. However, it may not be President Trump’s insistence that it can push the Fed to make changes this Wednesday.

But Trump’s policies have set the table for him.

His aggressive trade tactics, including 25% tariffs on $ 200 billion in Chinese goods that fueled retaliatory duties on US exports, have made companies uncertain about the future and more hesitant to invest.

The Fed‘s beige book, a collection of economic anecdotes from around the country, now regularly contains a scalable and eclectic collection of trade-related influences.

In the edition circulated ahead of this week’s Fed meeting, a company in the Northeast complaining about the cost of tariffs and a West Virginia tire manufacturer saying trade wars had hurt demand from Chinese customers were among dozens of examples.

The impact is also on hard data. A report last week showing the US economy grew at a 2.1% pace in the second quarter represented the first decline in business investment since 2016, and trade overall was a net drag on growth.

And it is a factor in the chill of global production, exacerbated by weaknesses by long-standing factors such as the aging demographics in Europe and Japan.

Trade uncertainty, weak business investment and slow growth abroad are likely to top Fed Chairman Jerome Powell’s list as he explains why the Fed is cutting rates, and why more rate cuts may be ahead. The Fed is expected to lower its rating borrowing rate by a percentage point percentage to between 2.00% and 2.25%.

“The trade war has been devastating for the global economy and a feedback loop has been created” that poses a risk to the US growth, said Eric Winograd, US Senior Economist at AllianceBernstein.

Fed policymakers “are responding primarily to risks, and most of the risks they are responding to are coming from the administration.”

At the same time, Winograd said, there is nothing out of the ordinary about White House policies affecting the economy. George W. Bush’s tax cuts, tax hikes under George H. W. Bush, and government spending under Barack Obama are among the examples under previous presidents, he said.

Some of the risks to which the Fed rate cuts are meant to respond are not made by Trump.

Chief among these is low inflation, which Powell is also likely to cite as a factor in the Fed’s rate cut decision. Slow rising prices have preceded Trump’s tenure for years and is at least partly driven by global competition and technological innovation. Trade tariffs if anything tends to raise prices, at least temporarily.

And while Trump’s tax cuts last year caused faster-than-expected growth in the economy, sparking concern from some Fed officials about a slowdown as tax hikes slow, consumer spending has stayed strong, rising at an annualized rate of 4.3% in the second quarter.

However, lowering the Fed’s forecast rate on Wednesday is at least in part a response to Trump’s actions, if not his words. But the president wants more. Earlier this week, on Twitter and in comments to reporters, he raised his demands for an even lower rate.

“Trump has undoubtedly tried to influence the Federal Reserve to further his agenda,” said Nick Maroutsos, Co-Director of Global Bonds at Janus Henderson Investors. And as the 2020 presidential race heats up, it is unlikely to stop. “Trump wants lower rates, to keep the dollar down – a dollar lower – and all this will help his campaign.”/Investing.com

 

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