Jerome Powell, head of the US Federal Reserve, speaks during a press conference following a meeting of the Federal Open Market Committee (FOMC) in Washington, D.C., USA, Wednesday, January 30, 2019.
Al Drago | Bloomberg | Getty Images
As President Donald Trump's trading war, investors stumbled upon, Wall Street has reached a security cap: new Federal Reserve price fluctuations to compensate for financial damage.
But senior economists from both political parties say it may not work smoothly even though the Fed says yes, for three reasons. And it brings with it the risk of US decades-long recovery as the presidential election in 2020 draws closer.
The first is that tariffs and tariff threats have created trust among trading partners and businesses, as stated in Business Roundtables eroded second quarter CEO Outlook Index. Demand from Fed price fluctuations can counteract the contraction effects of tariffs, but not the harm to corporate spirit of animal America.
Monetary policy can "modestly help," but "is not an ideal tool," said Glenn Hubbard, Dean of Columbia University's Graduate School of Business. "The negative impact of political uncertainty is likely to remain even if today's disputes with China and Mexico are resolved. This uncertainty is part of the investment gains made possible by corporate tax reform."
The other, more concrete reason is actually disturbing existing business patterns. Trump boasts that his charges have imposed on China a firm commitment to leave, but it also imposes on these companies.
"It is important bidding side effects that global supply chains are destroyed that cannot be resolved by monetary policy," notes Harvard's Greg Mankiw. As Hubbard, Mankiw once served as financial adviser to President George W. Bush.
The third reason is in timing. The financial error that tariffs induce can put in before Fed's medicine starts to work.
"Price reductions take about 1
Economists expected a decline in 2019 even before Trump declared "an appraiser" in December last year and set to prove it. After a tightening of the stimulus from the GOP tax cuts in late 2017, growth was narrowed in the last few months of 2018 and did not fall during the administration's full-year forecast of 3% or higher.
The surprising 3.1% growth from the first quarter of 2019, driven in part by stock accumulation, increased the hope of a more robust year. But job growth has slowed down, with forecasts projecting growth of around 2% or lower in both the second and third quarters of 2019. "The question is whether this is a natural settlement of the business cycle … or is the trade war any devastation to the economy, "observes Betsey Stevenson, another former Obama adviser. "I tend to believe there are signs that the latter is happening."
Result: Rising fears that the economy will not only grow slowly but instead shrink. Vanguard's chief economist this week increased the chances of a recession within the next 12-18 months to 40%, up from 30% earlier.
"The economy is at the edge," says Mark Zandi from Moody's Analytics. "Growth has slowed significantly from last year and is close to standing out. And if the president doesn't stand still soon."
Douglas Holtz-Eakin, former head of Congress's budget office, calls the trade war "harmful", but still considers it "too early" for the Fed to act. Cutting frequencies now to compensate for Trump's rates will limit the central bank's maneuvering room to respond to a more grim backlash, such as a global energy price shock or debt crisis.
"The idea that the Fed has just left some room to ease the policy if something else goes south," warns Justin Wolfers, a democratic economist at the University of Michigan, "should be scary."