Trump’s trade fight is mak­ing life dif­fi­cult for the Fed

The Myanmar Times - - Business -

WASH­ING­TON - The Fed­eral Re­serve is all but cer­tain to raise the U.S. bench­mark in­ter­est rate Wed­nes­day from 1.75 to 2 per­cent, a move that will make credit card, mortgage and busi­ness loans a bit more ex­pen­sive. But what the Fed does af­ter this week de­pends largely on the econ­omy - and Pres­i­dent Don­ald Trump’s trade fight.

The tra­di­tional eco­nomic play­book says Fed Chair­man Jerome H. Pow­ell should be in­creas­ing in­ter­est rates sev­eral more times this year and next to get rates back above 3 per­cent, a more nor­mal level given that the U.S. econ­omy looks very healthy by most mea­sures.

There are a record num­ber of job open­ings, un­em­ploy­ment is the low­est since 2000, growth is pick­ing up, and even in­fla­tion fi­nally ap­pears to be ris­ing to the Fed’s pre­ferred level. Un­der nor­mal cir­cum­stances, the tra­di­tional play­book says that by rais­ing rates Pow­ell and his team could work to ward off a po­ten­tial spike in in­fla­tion or an­other harm­ful bub­ble.

But th­ese are not nor­mal cir­cum­stances: Trump is promis­ing to turn U.S. trade pol­icy on its head, putting hefty tar­iffs on some of the na­tion’s big­gest trad­ing part­ners and clos­est al­lies. He has vowed to en­act more tar­iffs - even once threat­en­ing to choke trade off en­tirely - un­less they make ma­jor con­ces­sions.

World lead­ers and busi­ness ex­ec­u­tives are still try­ing to fig­ure out how to re­act to Trump’s trade agenda - and still won­der­ing whether he’s re­ally will­ing to start a full-blown trade war, which nearly all econ­o­mists pre­dict would hurt over­all eco­nomic growth.

Pow­ell and his Fed col­leagues have a dif­fi­cult de­ci­sion to make: If they think the econ­omy will stay on sure foot­ing de­spite the trade skir­mish, then the on­go­ing “nor­mal­iza­tion” of in­ter­est rates makes sense, es­pe­cially af­ter a decade of his­tor­i­cally low U.S. in­ter­est rates as the Fed boosted the post-re­ces­sion re­cov­ery (and stock mar­ket). But if Fed of­fi­cials think there’s a com­ing trade war that will crimp eco­nomic growth, they may want to put rate hikes on pause or at least slow them down.

The per­son ar­guably hav­ing to make the toughest cal­cu­la­tion about just how far Trump will go is Pow­ell. The Fed is an in­de­pen­dent agency, but Pow­ell was ap­pointed by Trump and will prob­a­bly get blamed for any eco­nomic or stock mar­ket hic­cups.

Here’s are the key ques­tions on which in­vestors and busi­ness lead­ers will be looking for the Fed to give clar­ity Wed­nes­day:

--1 or 2 more hikes in 2018? A slim ma­jor­ity of econ­o­mists are now pre­dict­ing two more in­creases af­ter June for a to­tal of four rate hikes in 2018 as the econ­omy con­tin­ues to show signs of strength. The United States hasn’t had a year with four in­creases since 2006.

Ac­cord­ing to the Fed’s meet­ing min­utes from May, of­fi­cials were still di­vided over whether to do one more hike or two. An­a­lysts will get more clues about which way they’re lean­ing Wed­nes­day, both in the Fed’s state­ment and when Pow­ell takes ques­tions at an af­ter­noon news con­fer­ence - re­marks cer­tain to be scru­ti­nized with a Tal­mu­dic in­ten­sity.

--What’s next for the econ­omy? The Fed will also re­lease its lat­est eco­nomic pro­jec­tions for 2018 and 2019. The pre­dic­tions on growth, in­fla­tion and other eco­nomic trends are closely watched and highly in­flu­en­tial, as they’re put to­gether by some of the na­tion’s most re­spected econ­o­mists draw­ing on mass vol­umes of data. The lat­est pro­jec­tions are not ex­pected to change much from the last ones in March, when the Fed lifted its growth ex­pec­ta­tion to 2.7 per­cent this year and 2.4 per­cent in 2019, largely be­cause of Trump’s tax cuts.

--Harsher warn­ings to Trump on trade? While some Fed of­fi­cials have been vo­cal about their dis­taste for the pres­i­dent’s tar­iffs, Pow­ell has stayed mostly mum about the is­sue. If he comes out strongly on Wed­nes­day, it’s yet an­other pow­er­ful voice telling Trump to cool down. Fed of­fi­cials are typ­i­cally loath to weigh in on eco­nomic pol­icy out­side their area, part of a tra­di­tional sep­a­ra­tion be­tween the cen­tral bank and the fed­eral gov­ern­ment.

But some of­fi­cials have al­ready joined the global cho­rus of eco­nomic and busi­ness lead­ers warn­ing Trump not to tip the world into a full-blown trade war. “If the con­flict in­creases, there will be less growth, more in­fla­tion and lower qual­ity of life all over the world,” said Fed of­fi­cial John Wil­liams, who is soon to take over as head of the New York Fed, in April.

--How ‘hot’ will the Fed let in­fla­tion get? In­vestors are also looking for a bet­ter in­di­ca­tion of how high the Fed will let in­fla­tion go be­fore it feels com­pelled to raise in­ter­est rates faster. The Fed’s cur­rent tar­get is 2 per­cent in­fla­tion. The United States is now close to hit­ting that goal, but var­i­ous Fed of­fi­cials have in­di­cated that it would be ac­cept­able to over­shoot the tar­get mod­estly in the com­ing months. Wall Street is won­der­ing if “mod­estly” means 2.2 per­cent or more like 2.6 per­cent. – The Wash­ing­ton Post

Photo: Bloomberg

Pres­i­dent Don­ald Trump speaks dur­ing an event on tax pol­icy in the Rose Gar­den of the White House in Wash­ing­ton.

Photo: JP

Co­or­di­nat­ing Eco­nomic Min­is­ter Darmin Na­su­tion.

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