Here are three reasons why a Fed rate cut won’t save Wall Street

As President Donald Trump’s trade wars rattle investors, Wall Street has reached for a security blanket: new Federal Keep to rate cuts to offset the economic damage.

But senior economists from both political parties say it may not work that smoothly rounded off if the Fed says yes, for three reasons. And that poses risks to America’s decade-long recovery as the 2020 presidential election gathers nearer.

The first is that tariffs and tariff threats have shaken confidence among trading partners and concerns, as shown by the Business Roundtable’s eroded second-quarter CEO Economic Outlook Index. Demand-side stimulus from Fed rate percentages can counter contractionary effects of tariff costs, but not the harm to the animal spirits of corporate America.

Monetary policy can “modestly boost” but “is not an ideal tool,” says Glenn Hubbard, dean of Columbia University’s Graduate School of Business. “That denying effect from policy uncertainty is likely to remain even if the present disputes with China and Mexico are resolved. This uncertainty is blunting allotment of the investment gains that were made possible by corporate tax reform.”

The second, more concrete reason is verified disruption to existing business patterns. Trump boasts that his tariffs have imposed a price on China by well-springing firms to leave, but that imposes costs on those firms as well.

“There are important supply-side effects as universal supply chains become broken that cannot be addressed with monetary policy,” notes Harvard’s Greg Mankiw. Be fond of Hubbard, Mankiw once served as top economic adviser to President George W. Bush.

The third reason is lags in timing. The trade bug that tariffs induce can set in before the Fed’s medicine starts working.

“Rate cuts take about 12 months to drink substantial impact,” explains Jason Furman, who chaired President Obama’s Council of Economic Advisers. “Tariffs could be much faster resolution, so that could be a real problem for the economy in the second half of 2019.”

Economists expected a 2019 slowdown even earlier Trump declared himself “a tariff man” last December and set about proving it. After a burst of stimulus from the modern development 2017 GOP tax cuts, growth tapered in the latter months of 2018 and fell short of the administration’s full-year projection of 3% or sharp.

The surprising 3.1% growth from the first quarter of 2019, driven partly by inventory accumulation, raised wishes of a more robust year. But job growth has declined, with forecasters projecting growth around 2% or lower in both the instant and third quarters of 2019.

“The question is whether this is a natural settling of the business cycle…or are the trade wars wreaking some shambles on the economy,” observes Betsey Stevenson, another former Obama adviser. “I tend to think that there is grounds that the latter is happening.”

The result: rising fears that the economy will not just grow more slowly but as a substitute for actually shrink. Vanguard’s chief economist this week raised the odds of recession within the next 12-18 months to 40%, up from 30% in the past.

“The economy is on a razor’s edge,” says Mark Zandi of Moody’s Analytics. “Growth has slowed significantly from stand up year and is close to stalling out. And it will if the president doesn’t stand down soon.”

Douglas Holtz-Eakin, former top a intercept of the Congressional Budget Office, calls the trade war “damaging” but still considers it “premature” for the Fed to act. Cutting rates now to offset Trump’s excises would narrow the central bank’s maneuvering room for responding to a more ominous setback such a global power price shock or debt crisis.

“The idea that the Fed has only a little bit of room left to ease policy if something else loses south,” warns Justin Wolfers, a Democratic economist at the University of Michigan, “should be terrifying.”