Trump has reached a new level of incoherence in his China trade war with a thoughtless plea to the Fed

16-May-2019 Intellasia | The Independent | 6:00 AM Print This Post

For Donald Trump to urge the Federal Reserve to boost the US economy as part of the trade war with China is at least consistent.

Property developers like cheap money because it funds their developments. And they like the inflation that is likely to follow because that boosts the asset value of their property. But in suggesting this as a policy right now, he is being incoherent.

For a start, having the president urge the US central bank to do this that or the other is plainly silly because were he to succeed in influencing it (which at least in the short-term he can’t) that would have an entirely negative on market confidence in the Fed and in the US financial system more generally.

We know what happens when politicians try to wield undue influence over financial markets. They did so in the run up to the crash of 2008 by urging banks to grant home loans to people who would not normally qualify. True, the banks and rating agencies, and in some measure the Fed, were complicit in the policy, but Congress was a driver of it.

 (The Independent)

(The Independent)

Second, interest rates do not really work as a trade war weapon, except insofar as lower rates cut the value of the currency and at the margin might therefore boost exports and cut imports.

The Chinese authorities are easing monetary policy at the moment to offset a slowdown in the economy, as Donald Trump notes that was what prompted his call for the Fed to act. But the slowdown in China is part of two wider transitions: from excessive dependence on exports to an economy driven more by domestic demand; and from investment and manufacturing to services.

The trade impact is certainly negative and comes at an awkward time for China. But I suspect China would have had to loosen monetary policy anyway.

Third, the US economy is running at full bore. Unemployment is down to a 50-year low. That is a stunning achievement and it would be uncharacteristic were the president not to seek credit for that. But actually the expansion has been running for 10 years this summer becoming the longest in US history and this president happened to inherit it. It may have been given a final kick upwards by the Trump administration’s tax cuts, but that itself carries concerns.

You should try to boost demand at the bottom of the cycle, not at the top. It may be that the US economy will need looser monetary policy in the months ahead. Or it may need tighter. But this has very little to do with trade relations with China.

For China, actions by the US so far have cut demand a bit. But for the US the trade war, so far at least, has probably been demand-neutral. The pluses have offset the minuses. So it makes no sense to loosen policy. Insofar as the trade tensions have undermined US financial confidence (witness the rough few days on the markets) then there may eventually be some hit to the economy. But not yet.

That leads to a final point. Confidence matters. The mood of the business and financial communities has been twitchy in recent months. This is as you would expect at this stage of the economic cycle, particularly with uncertainties around the valuations of high-tech companies thrown in. So ask this question. Would having a Fed which was more subservient to the president increase or decrease confidence? I think we know the answer to that. The Fed has to stand firm, as it will.



Category: China

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