When President Trump proclaimed that “The Fed has gone crazy,” the elites were stunned. When President Trump exclaimed, The Fed “is making a big mistake with ridiculous rate-hikes,” the establishment was dumbfounded. And when President claimed that The Fed was his “biggest threat, because rates were rising too fast,” the deep state lashed out with 25th Amendment headlines and “Democracy and independence under threat” byelines.
So isn’t it just a little ironic that The Wall Street Journal – that bastion of free market capitalism and oracle of financial opinion should admit in its Editorial Board’s latest opinion that Trump is right and The Fed needs to slow down on the rate-hikes.
America Is Not An Island
As the world economy slows, Trump and the Fed need to adapt.
President Trump’s biggest achievement has been the revival of faster U.S. economic growth, but past performance is no guarantee of future results. The White House should be worried about growing economic strains in the rest of the world, and policy makers need to prepare. The U.S. is not an island.
For now the American economy and especially the labor market seem strong as tax reform and deregulation unleash animal spirits. But the German economy shrank 0.2% in the latest quarter, the first contraction since 2015. Europe’s largest economy will still grow this year, but a trade surplus and negative interest rates aren’t a growth tonic. Europe in general seems to be reverting back to its post-crisis mean of meager growth.
Japan contracted 0.3% in the last quarter, perhaps ending its modest growth spurt. Beijing last month said China’s economy grew a surprisingly slow 6.5% year-on-year in its latest quarter, and that official figure is usually an overstatement.
Some of this is due to such one-time factors as bad weather, but anxious markets are signaling larger concern. German auto exports are weak, and China is trying to sustain growth without adding to its debt overhang. The high-yield bond market has the jimmy legs, and oil prices are down on weaker demand. Even Federal Reserve Chairman Jerome Powell, the insouciant one, on Wednesday called events “concerning.”
Add currency shifts to those worry beads, as the U.S. dollar soars. Beijing is trying to stem flight from the yuan, and the pound fell another 1.5% against the dollar on Thursday on Brexit woes. The euro’s decline against the dollar needs particular watching because it’s the world’s most important price and contributes to investment uncertainty. Sharp changes in the euro-dollar rate contributed to the global financial panic in 2008.
European political risks may increase, as Germany could soon gain a new leader and the European Union tries to bludgeon Italy into an anti-growth budget. Prime Minister Theresa May’s government in London is hanging by a thread as she struggles to sell a European Union divorce deal to Parliament.
The world’s fifth-largest economy could crash out of its most important trading relationship with no alternative in place. A disorderly Brexit could also usher in a socialist Labour government led by Jeremy Corbyn, and watch the pound fall if that happens.
All of this is a warning for Mr. Trump and others in Washington: No moat can protect the U.S. economy, and they need to adapt.
Start with the Fed, which should rethink its December rate increase. No other major central bank is likely to raise its rates soon. The Fed needs to weigh whether it should expand the gulf between U.S. and foreign monetary policies at a fragile moment as global investors demand more dollars.
Mr. Powell will be wary of seeming pliable amid Mr. Trump’s demands for lower rates, but tighter credit conditions and low inflation support a pause independent of Mr. Trump’s bluster. Now is not the time for a doctrinaire march toward “normalcy,” which the Fed can resume in 2019 if the data warrant.
Mr. Trump should also settle his trade tempests. He wants Germany to export less, and look at the result after a quarter of soft auto sales abroad. Trade uncertainty is weighing on business investment much as Barack Obama’s regulatory assaults did. If you’re a CEO and don’t know how global supply chains will be affected by tariffs or new trade deals, you delay investment.
Mr. Trump’s steel tariffs are still hitting Mexico and Canada even after the revised Nafta deal, and his 25% car tariff reappears now and again like Freddy Krueger. Adviser Peter Navarro suggested a long trade war with China last week, and stocks promptly sold off.
Mr. Trump claims the U.S. economy is strong enough to ride out his trade wars. Well, how lucky does he feel? Last week the President suffered a bruising midterm election defeat even with a strong economy. If the U.S. starts to slow like its major economic partners, he’s going to lose the 2020 election before anyone has time to “win” a trade war.
This month’s G-20 summit is a chance for Mr. Trump to show some economic statesmanship and look for a trade truce. This needn’t be a show of weakness as he can continue negotiations to press market reforms abroad on China’s intellectual-property theft or Europe’s tax assaults on American tech companies. But he needs to signal that the U.S. won’t continue punitive tariff attacks on allies.
With his polarizing political style, Mr. Trump even more than most Presidents will succeed or fail based on economic results. He should appreciate that a recession in the rest of the world is a threat to the U.S. economy and his Presidency.
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How long before WSJ is demonized and slandered for such heresy?