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Trump's Fed Criticism May Help Pass the Buck if Tariffs Stall Economy

Trump's Fed Criticism May Help Pass the Buck if Tariffs Stall Economy
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Friday, 20 July 2018 08:22 AM Current | Bio | Archive

President Trump on Fed Policy

President Donald Trump said about the rate increases by the Fed during an interview conducted by CNBC: “I am not happy about it.”

His remarks depart from a convention in which presidents have refrained from speaking specifically on the Fed’s monetary policy.

Now, the fact that the president gave his remarks in a television interview, and not on a tweet, doesn’t carry the force of official policy, but it is a worrying signal nonetheless.

Inflation has become low and stable over the last quarter century. Not because of globalization, not because of technology, but because independent central banks, run by economists who have been allowed to get on with the job.

It is worth remembering that the Federal Reserve today is as politically independent in the legal sense as it was when it was run by Fed Chair Arthur Frank Burns in the 1970s. Fed Chair Burns has the reputation of having been overly influenced by political pressure in his monetary policy decisions during his time as Chairman as he used to collaborate with President Nixon before changing interest rates. Fed Chair Burns’ easy-money policies is widely blamed for contributing to high inflation in the 1970s.

Now, today, with so many vacancies on the Federal Reserve Open Market Committee (FOMC) at the moment and, what is worse, so few economists among the voting members of the FOMC, markets should not take Fed independence for granted.

The Fed, even the Fed run by a lawyer, is not likely to react to President Trump’s remarks. The members of the FOMC know that it is their independence from government that has given the US economy the stability it needs.

Markets have reacted, perhaps overreacted a little. There is no need for 2-year yields to fall just yet.

Trump’s complaint seems to be that the Fed is trying to limit the economic damage caused by deficit financed fiscal spending.

The good news for Trump is that the tax increases (tariffs), currently being put into place on trade, will work against the fiscal stimulus and the consumer tax increases (tariffs) will inevitably slow the U.S. economy down. That may give the Fed reason to “pause” in its rate tightening.

Of course, a conspiracy theorist might suggest that the president’s remarks are a way of being prepared to blame the Fed for when the Trump trade tariffs cause an economic slowdown.

Japan Inflation

Japan is of course a country where central independence is not necessarily that well established. Inflation in Japan came in unchanged with the headline consumer price index increasing by 0.7 percent on the year in June, as it did in May, and still well below the Bank of Japan's 2.0 percent inflation target. This follows from import data earlier this week suggesting that domestic demand is not as robust as it could be. The problem in Japan, as ever, is that consumers think inflation is a lot higher than it actually is and they therefore think that their real standard of living and spending power is a lot lower than it actually is.

German Producer Prices

German producer prices (PPI) rose for a fourth straight month in June. A 0.3 percent monthly advance was in line with expectations and large enough to lift the annual PPI inflation rate from 2.7 percent to 3.0 percent, equaling its highest mark since September 2017.

This offers an indication of the pricing power of German companies. That may also be relevant as an indicator to look at in these times of trade uncertainty.

Growth Euro Area

The IMF has just published its annual assessment on growth in the Euro area.

It might be helpful for investors to keep in mind that the report cannot include the effects of the tariffs increases or straight tax increases in the United States and the European Union (EU) which will have, later on, negative effects.

The report reads among other things that embed a lot of warnings for investors: “An array of global and domestic risks hangs over the outlook. Trade tensions have risen with the recent U.S. imposition of tariffs on steel and aluminum imports. Policy inaction and political shocks at the national level are important domestic risks, especially with regard to rebuilding fiscal buffers in countries with high public debt and implementing structural reforms while growth remains strong. And the lack of progress in Brexit negotiations raises the risk of a disruptive exit.”

Yes, Euro area growth appears to have peaked.

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

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A conspiracy theorist might suggest that the President’s remarks are a way of being prepared to blame the Fed for when the Trump trade tariffs cause an economic slowdown.
trump, fed, criticism, economic, slowdown
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2018-22-20
Friday, 20 July 2018 08:22 AM
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