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The economy needs this more than an interest-rate cut

Rick Newman
Senior Columnist

With strong hiring in June, investors are torn over whether the Federal Reserve will cut interest rates this summer.

The case for cutting rates focuses on tepid wage growth, other signs of slack in the labor market and the economic damage caused by President Trump’s protectionist trade policy. But it would also be unusual for the Fed to cut rates with unemployment near record lows, the stock market near record highs and short-term rates already relatively low at 2.5%.

Stocks will rise and fall over this question during the next few weeks, as investors parse every syllable uttered by various Fed officials speaking publicly. But what the economy really needs isn’t monetary stimulus in the form of interest-rate cuts. What it needs is an end to Trump’s trade war with China and other select countries.

Markets rose after Trump and President Xi Jinping of China agreed to restart trade negotiations in late June. The buoyancy in stocks suggests there’s optimism about a trade deal being within reach. But there are other reasons to think a deal is nowhere to be seen, with trade hostilities likely to resume before July 4th sunburn fades.

Despite the agreement to resume talks, China and the United States remain at loggerheads about key issues in the dispute. Trump wants China to reform its economy in ways that would undermine an economic strategy decades in the making. China insists Trump remove all tariffs before they make any concessions, which would remove a cudgel Trump has put in place against fierce establishment resistance. One or both sides will have to cave to get a deal, and it’s hard to see the autocratic presidents doing that.

Federal Reserve’s next move

Federal Reserve Chair Jerome Powell speaks on the economy outlook and monetary policy review at the Council on Foreign Relations, in New York, Tuesday, June 25, 2019. (AP Photo/Richard Drew)

Fed Chair Jerome Powell has referred to trade worries as “crosscurrents” in the economy that have grown more worrisome since Trump raised tariffs on Chinese imports in early May. The strong jobs report for June shows no signs of damage from the tariff, even if there are signs elsewhere, such as deteriorating business investment and declining consumer confidence. Powell has signaled the Fed could cut rates to offset the damage caused by Trump’s tariffs, if it sees signs of meaningful damage.

That would be the tail wagging the dog. The Fed’s job is to keep inflation low and maximize employment—not to write insurance policies for harmful protectionist policies. The Fed, of course, could decide it must act because Trump’s trade policies harm employment. And if you look at the June jobs report with a magnifying glass, there’s one possible sign that is happening: Weekly wage growth in manufacturing is just 1.8%, much lower than the national average of 3.1%. The manufacturing sector has been bearing much of the cost of the Trump tariffs, so far.

The 2020 US presidential election

There’s good reason for Trump to make a deal and end his trade war with China. As the 2020 U.S. election draws closer, pressure will mount on Trump to produce a deal and claim he kept a key campaign promise. But China knows that, which means their demands may toughen rather than ease as the election draws closer. None of this means Trump will make a deal, of course. Some analysts think the election will come and go without one. That will put the Fed in the position of making a move it probably wouldn’t otherwise make, bailing out the president for the sake of the underlying economy.

Rick Newman is the author of four books, including “Rebounders: How Winners Pivot from Setback to Success.” Follow him on Twitter: @rickjnewman

Confidential tip line: rickjnewman@yahoo.com. Encrypted communication available. Click here to get Rick’s stories by email.

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