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Fed Must Treat Trump Tariffs Just Like a Regular Tax Hike

Fed Must Treat Trump Tariffs Just Like a Regular Tax Hike

Thursday, 19 July 2018 08:18 AM Current | Bio | Archive

The Fed’s Beige Book and More

Tariffs featured heavily in the Federal Reserve’s latest Beige Book, a summary of the state of U.S. business across the central bank’s 12 regional districts

The Fed’s Beige Book was consistent with the continued gradual tightening of monetary policy that is to be expected. The tightening U.S. labor market continuous to show through in the form of wage pressures, which was also to be expected. Companies are also reporting that certain costs are rising as a result of President Donald Trump’s barrage of tariffs increases on trade.

Early tariff increases were deliberately chosen to avoid the consumer but that means that the ‘yoke’ of taxation is falling on to the shoulders of companies by higher costs.

While this may increase inflation in the short term, if those costs are passed on to consumers, such a pass-through may will take a few months.

Moreover, the Federal Reserve should treat Trump’s tax hikes (tariffs) the same way a central bank would treat any tax hike, that is to say as a force for slower growth, even if there is a temporary increase in inflation.

Besides that, today we’ll get the Philadelphia Fed Business Outlook Survey for which the consensus is we could see a re-acceleration from the month before that in June slowed sharply from record strength in May. The consensus for July is 22.0 vs 19.9 in June.

Never forget, this is a sentiment survey and therefore should be taken with care.

Federal Reserve Vice Chairman Randal Quarles is scheduled to give prerecorded introductory remarks at the Alternative Reference Rates Committee Roundtable in New York. This comes straight after Fed Chair Jerome Powell’s testimony before Congress.

More importantly, Vice Fed Chair Quarles and Fed Chair Powell are not economists but lawyers. If they were economists their remarks may have more importance.

There is also more political noise about whether Trump has become muddled about what the word “know” means, but this is not likely to have a bearing on financial markets just yet.

Japan Exports

Meanwhile, Japanese trade data showed some slowdown in the growth of exports in the month of June, which still grew 6.7 percent but was down from 8.1 percent in May and short of consensus of 7.0 percent. The data is still consistent with a stable or rising global trade to GDP ratio. The tariffs increases in the States so far, are still too small to be considered as a trade war.

However, the data is a warning of the fact that we may be closer to a trade war than is likely to be good for the global economy. Japanese import demand fell, but that is a reflexion of the weaker nature of Japanese domestic demand and not necessarily a comment on global trade patterns.

UK Retail Sales

From the United Kingdom we got the June retail sales figures that dropped 0.5 percent from the month earlier, following an upwardly revised 1.4 percent advance in May and missing market expectations of a 0.2 percent gain. Non-food stores provided the largest downwards contribution as consumers stayed away from stores and instead enjoyed the World Cup (soccer) and the heatwave. In the second quarter of the year, retail trade grew 2.1 percent, which is the biggest calendar-quarter increase since the first quarter of 2004.

In the real world, the main factors that affected the retail sales numbers were warm weather and the final of the World Cup of football (soccer).

Emerging Markets

According to three of the world’s largest money managers, emerging markets (EM) are poised to rally after more than $7 trillion in stocks slid into bear territory.

Goldman Sachs Group Inc., Franklin Templeton Investments and BlackRock Inc. say cheap prices, rising corporate profits and strong fundamentals will outweigh risks from a tit-for-tat trade war, rising interest rates and potential U.S. recession.

Isabelle Mateos y Lago, chief multi-asset strategist at BlackRock Investment Institute said: “We do like emerging markets (EM) assets, particularly EM equities. It’s a combination of the global growth backdrop, earnings expectations for emerging-market corporations and valuations.”

It’s a fact that pessimism towards developing-nation stocks is close to the highest level in 23 years, which is normally a sign to increase exposure, not reduce it, as long as it doesn’t coincide with a recession.

Yes, food for thought.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The Federal Reserve should treat Trump’s tax hikes (tariffs) the same way a central bank would treat any tax hike, that is to say as a force for slower growth, even if there is a temporary increase in inflation.
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Thursday, 19 July 2018 08:18 AM
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