Features

Trump’s tariffs put pressure on the US Federal Reserve

Donald Trump's bullying campaign against Federal Reserve chairman Jerome Powell yielded the first interest-rate cut in a decade.

Donald Trump © SAUL LOEB/AFP/Getty Images

Donald Trump is "crazy like a fox", says Niall Ferguson in The Sunday Times. The old American phrase well describes the president's ingenious knack for getting what he wants. Last week his bullying campaign against Federal Reserve chairman Jerome Powell yielded the first interest-rate cut in a decade. Yet Trump wants more than the quarter-point reduction that Powell offered up. The solution? The president tweeted that he intends to impose fresh tariffs of 10% on $300bn of Chinese goods from the start of September. The resulting trade chaos only increases the pressure on the Fed for further easing to clear up the mess.

The unexpected trade-war escalation roiled markets. Monday was the worst day of the year so far for US stocks, with the S&P 500 shedding 3%. That came on the heels of a 3.1% slide last week, the worst weekly performance of the year so far. The FTSE 100 lost 2.5% on Monday, its worst performance since December last year. Powell did his "best impression" of a "Fed chair making his own data-driven decision", says Felix Salmon on Axios, but no one was fooled about what had forced his hand. His insistence that the rate cut was driven by "trade policy uncertainty" is belied by the fact that US growth remains strong and unemployment is at its lowest level since 1969.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

In any case, falling interest rates are not "much of a reason to buy stocks", says Justin Lahart in The Wall Street Journal. With the second-quarter earnings season in full swing, it is hard to describe company results as "anything more than a disappointment". FactSet data shows that on current estimates, S&P 500 earnings slipped 2.2% in the second quarter compared with the year before. Yet US shares are still "dancing near record highs".

Easy money won't save markets

As for the trade war escalation, that is "not a new risk, it was simply overlooked". That's why the return of Trump's "tariff man" act elicited a much bigger market reaction than Powell's widely anticipated rate cut announcement. US investors no longer believe that trade wars are "easy to win", says Oliver Jones of Capital Economics. Last summer the conflict was regarded as "almost a non-issue", but with no resolution in sight, markets are now heeding the Fed's message that the global trade situation brings real downside risk.

Advertisement
Advertisement - Article continues below

With rhetoric on both sides becoming heated China this week accused Washington of "deliberately destroying international order" people should stop asking "when will the trade war end", says Dan Harris on the China Law Blog. Economists who say that both sides will gain from a deal are neglecting the wider political picture. Domestic pressures and geopolitical imperatives mean that this conflict is not going away. "The US-China cold war has begun" (see below).

Advertisement

Recommended

Visit/519858/how-long-can-the-good-times-roll
Economy

How long can the good times roll?

Despite all the doom and gloom that has dominated our headlines for most of 2019, Britain and most of the rest of the developing world is currently en…
19 Dec 2019
Visit/516944/why-wall-street-has-got-it-wrong-again
Economy

Why Wall Street has got the US economy wrong again

The hiring slowdown does not signal recession for the US economy. Growth is just moving down a gear, says Brian Pellegrini.
25 Oct 2019
Visit/504252/brace-yourself-the-global-economy-might-be-healthier-than-it-looks
Economy

Brace yourself – the global economy might be healthier than it looks

Investors have been worried about a global recession since the start of the year. But the latest indicators suggest things might not be so bad. John S…
2 Apr 2019
Visit/investments/stockmarkets/600878/coronavirus-pandemic-financial-markets
Stockmarkets

A global coronavirus pandemic seems inevitable – are markets still too complacent?

Coronavirus is going global. It’s only a matter of time before it’s classed as a pandemic. John Stepek looks at the markets’ reaction, and explains ho…
24 Feb 2020

Most Popular

Visit/investments/stockmarkets/600878/coronavirus-pandemic-financial-markets
Stockmarkets

A global coronavirus pandemic seems inevitable – are markets still too complacent?

Coronavirus is going global. It’s only a matter of time before it’s classed as a pandemic. John Stepek looks at the markets’ reaction, and explains ho…
24 Feb 2020
Visit/investments/property/buy-to-let/600849/come-back-buy-to-letters-all-is-forgiven
Buy to let

Come back buy-to-letters, all is forgiven

The government is winning its war against small private buy-to-let landlords. But who benefits?
23 Feb 2020
Visit/personal-finance/pensions/pension-tax/600877/why-it-makes-sense-to-scrap-higher-rate-pensions-tax
Pension tax

Why it makes sense to scrap higher-rate pensions tax relief

The point of pensions tax relief is to keep you out of the means-tested benefits system. The current system is ridiculously generous, says Merryn Some…
24 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020