Markets register a shock, but is Trump right to blame the Fed ?
WASHINGTON: It takes a lot to kill an economic expansion, typically requiring a major shock to bring growth to a halt and trigger a US recession. ...
This week investors signalled that moment may have arrived, and one big question is whether that shock has come from President Donald Trump's trade war or a mistake by policymakers at the US Federal Reserve.
As bond markets flashed concern about recession on Wednesday (Aug 14) and major stock indices cratered, Trump put the blame squarely on the Fed for continuing to raise rates through the end of last year. Even Trump foe and New York Times economics columnist Paul Krugman dinged the Fed for"a clear mistake."
A cut of that magnitude would typically be associated with serious economic risk, not an economy with record low unemployment and ongoing growth.
As it stood, major US stock indices slumped by around three per cent by Wednesday's close with the blue chip Dow Jones Industrial Average suffering its largest percentage loss of the year. Bond investors pushed the yield on the 30-year Treasury bond to a record low.
It was perhaps the most dramatic bit of evidence yet of just how the landscape for the Fed has changed over the past few months, from one that Powell deemed"remarkably positive" as of last October, to one of rising risks for the United States' record-setting, decade-long expansion.
Yet, as Trump's trade rhetoric and his imposition of tariffs on trading partners ratcheted up this year, particularly since May, investors have acted as if a breaking point had been reached.
"The challenge is that Trump's trade policy has proven so erratic that you cannot relieve the sense of uncertainty," as firms adjust to what may be a years-long rearrangement of global supply chains and cost structures, said Tim Duy, an economics professor at the University of Oregon."So the question becomes is policy going to be easing enough ... or remain so tight that the economy remains vulnerable?"
For Trump, who is hoping to make the economy a central part of his case for his 2020 re-election campaign, further rate cuts could not come fast enough. He has been berating the Fed for its rate increases for more than a year - since even before his trade rift with China morphed from being considered an economic annoyance to a larger and potentially durable risk.
In both the 2001 and 2007 downturns, the Fed raised rates even after the yield curve inverted and did not cut until just a few months before the start of recession about a year later.
In an interview scheduled to air on Fox Business Network on Friday, former Fed chief Janet Yellen said she felt the US economy remained"strong enough" to avoid a downturn, but"the odds have clearly risen and they are higher than I'm frankly comfortable with."Read more: CNA
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