Tags: tariffs | slow | economic | growth | rate | hikes

Raising Tariffs Will Always Slow Economic Growth

snail on the coins against white background- slow economy concept

Wednesday, 28 November 2018 10:30 AM Current | Bio | Archive

Larry Kudlow, President Donald Trump’s chief economic adviser, said Trump is hopeful about a breakthrough in talks with China at the end of the week in Buenos Aires, but that the president is also prepared to increase U.S. tariffs if necessary.

Kudlow also said that Trump and President Xi would be joined by trade representatives from both sides.

For the time being, markets seem to be focusing on the first part of that statement.

However, Kudlow also signaled that trade talks with China have stalled ahead of the G-20.

It’s interesting to see how the pattern of equity markets moved around Kudlow’s comments, which in fact just shows how sensitive equities are to the threat of trade tariffs. Markets recovered as soon as there was a “hint” of a possibility that there might be a deal.

Investors could do well keeping in mind that “listed” companies dominate global trade and anything which hurts global trade really hurts “listed” companies.

Raising tariffs is a policy that will almost always slow growth. Raising interest rates does not automatically slow growth.

Fed Chair Powell Speaks 

Monetary policy is about achieving balance and stability. If liquidity demand is falling for example, a central bank that raises rates will not slow growth but will stabilize growth.

It is unlikely that Federal Reserve Chairman Jerome Powell will give too much details on that aspect of monetary policy in his speech that is scheduled later today.

I don’t think it’s an overstatement to say that today’s speech will be the most critical of Powell’s short time at the head of the Fed as market observers are waiting for any kind of signal that the Fed chair could have changed somewhat his view on the gradual fed-funds rate hikes that are on the cards for next year.

Now we know that economics is not really the Fed chair’s area of expertise.

Besides all that, in an interview with The Washington Post, Trump repeated he was not happy with his selection of Powell at the head of the Fed and consequently the monetary policy the Fed is applying. “I’m just saying, I’m not happy with the Fed. So far, I’m not even a little bit happy with my selection of Jay. Not even a little bit,” Trump told the Post.

3rd Quarter GDP

Real gross domestic product (GDP) increased at an annual rate of 3.5 percent in the third quarter of 2018, according to the "second" estimate.

Real gross domestic income (GDI) increased 4.0 percent in the third quarter, compared with an increase of 0.9 percent (revised) in the second quarter. Imports, which are a subtraction in the calculation of GDP, increased.

The deceleration in real GDP growth in the third quarter primarily reflected a downturn in exports and decelerations in nonresidential fixed investment and in PCE.

Imports increased in the third quarter after decreasing in the second.

The Fed’s gradual rate hikes should remain well on track.

Tomorrow’s Minutes of the FOMC and Fed Policy

That said, the Minutes of the Federal Open Market Committee (FOMC) that will be released tomorrow may give more details however.

For monetary policy, the essential fact remains that inflation needs to be controlled but there is no need to squeeze inflation out of the economic system. As such, Fed funds rate increases are stabilizing rather than negative for growth or particularly equity markets. Raising tariffs, which are in fact taxes, and adding uncertainty about future tariff increases are more likely to be economically and equity harmful.

Brexit Divorce Package Could be Amended

There are media reports that suggest that Prime Minister Theresa May will allow amendments to the Brexit divorce package from the European Union (EU) to be debated by Parliament.

As the current Parliament doesn’t have a majority in favor of anything, that’s not necessarily a terribly high risk strategy.

The UK is required by law to exit the EU with a hard exit on March 29.

There is a majority against that, but as no one can agree on what the alternative should be, the default stays in place for now.

Interestingly, the Bank of England meanwhile has the “unenviable” task of publishing an economic assessment of the current Brexit divorce package.

The Bank of England’s economists can provide an objective analysis but in this rather fevered political climate, it is unlikely that either side of the debate will treat the report in a neutral or objective manner.

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

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It’s interesting to see how the pattern of equity markets moved around Kudlow’s comments, which in fact just shows how sensitive equities are to the threat of trade tariffs. Markets recovered as soon as there was a “hint” of a possibility that there might be a deal.
tariffs, slow, economic, growth, rate, hikes
Wednesday, 28 November 2018 10:30 AM
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