Trump calls on Fed to help win the trade war
Donald Trump called on the Federal Reserve to help win the trade war with China, saying victory would be inevitable if the US central bank matched stimulus moves in Beijing.
“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,” the US president said in a tweet on Tuesday. “If the Federal Reserve ever did a ‘match’, it would be game over, we win! In any event, China wants a deal!”
Speaking to reporters later on Tuesday, Mr Trump said the US economy was doing well “by every measure” and described the tussle with China over trade as “a little squabble”. Tensions with Beijing stemmed from its unfair treatment of the US, he argued, predicting the situation would turn out extremely well. “We’re in a very strong position,” said the president.
Mr Trump’s renewed pressure on Fed chair Jay Powell to lower short-term interest rates came amid a period of volatility on world stock markets as hostilities over trade escalate between the US and China.
On Monday Beijing announced it would raise tariffs on $60bn of US goods, saying it was responding to the Trump administration’s move on Friday to boost tariffs on $200bn of Chinese imports to 25 per cent.
The US has set in motion a further plan to impose levies of 25 per cent on a further $300bn of Chinese imports, though no final decision has been made on these and they would only bite after a comment period running into late June.
Shares in the US and Europe bounced on Tuesday following earlier losses. On Wall Street, the S&P 500 index was up 1.3 per cent in midday trading after a 2.4 per cent loss on Monday — its worst since January.
Mr Trump has regularly demanded the Fed slash interest rates to counter risks to growth, but for the time being, the US central bank is signalling rates will be kept on hold. Some investors are betting that situation will change later this year as trade risks dampen the growth outlook, however, foreseeing a significant chance of a reduction in the second half of the year.
The Fed has sent mixed signals over its next rates move, and added presidential pressure will probably make deliberations more fraught. Its most recent forecasts in March suggested interest rates will be kept on hold for at least the remainder of the year, but some policymakers have hinted at the idea of an insurance rate cut given low inflation. This month Mr Powell played down weak inflation, suggesting it is “transitory” and stressing there was no immediate need to move rates higher or lower.
The escalation of trade hostilities could revive one of the so-called downside risks that Fed policymakers have been watching for more than a year, adding to arguments from doves that a rate reduction is in order. But higher tariffs should temporarily push up inflation, which could alleviate some of the central bank’s worries that price growth is too low.
“Like the market, the Fed doesn’t see the US economy as being particularly at risk because of trade tensions, so one important catalyst for a rate cut is just not there,” said Roberto Perli, an economist at Cornerstone Macro, in a note on Tuesday.
“For now, the best bet remains that the Fed will stay on hold until either the US economy deteriorates significantly or until an agreement is reached that inflation is too low. Neither of those conditions seem very close in time.”