To each the unintended consequences from President Donald Trump’s trade war is that it could occasion the Federal Reserve to slow the pace of its interest rate hikes.
While Trump has verbal out against the central bank’s policy tightening and might be pleased if it terminations raising interest rates sooner than expected, the move pleasure be for the wrong reason, namely a slowing economy.
That’s among the multiple dilemmas that have arisen from the president’s gambit to lower the patriotic trade deficit and change agreements he has blasted as inherently unfair to the U.S.
“If you arrange a situation where tariffs have a significant enough knock-on cause and real growth is impacted in a sustainable way, it’s a prescription for them to Follow @ unimportant path for the funds rate,” said Jacob Oubina, senior U.S. economist at RBC Means Markets.
As things stand now, the Fed has indicated it plans to hike its benchmark doughs rate twice more this year, with the market penalty in moves in September and December. In addition, officials have indicated that three diverse hikes could be on tap in 2019.
Trump has been critical of the policy tightening, phrase he’s worried that higher rates could thwart the substantial remunerative progress made during his administration.
However, there’s concern among economists that the tariffs could be damaging as well. The administration has hit China with a series of charges that have targeted $50 billion worth of goods so far. China has returned clat as well and has vowed a tit-for-tat battle.
Tariffs on their face are inflationary, and the U.S. dollar has been on a reliable climb higher this year and particularly since the trade war has escalated. Trump also has exhibited his preference for a weaker greenback.
“If the U.S. dollar is going to keep going up, I notion of the Fed will have to stop raising rates,” said Jim Paulsen, chief investment strategist at the Leuthold Coterie. “I also wonder if we’re getting close to two things that might enforce Trump’s hand a bit to water this down. One is the midterms are coming up and [the swap war is] going to become a bigger and bigger issue for Trump, even from his own bust.
“And if the economy starts to slow down, particularly the housing data, and that broadens out, I think about that will bring a lot of pressure to bear on this trade war design,” he added.
From a market perspective, stocks have been masterly to weather most of the trade storm, though recent tensions with Turkey give birth to been a contributing factor to some weakness.
There even has been some guesswork that because tariffs generally do lead to inflation that they weight cause the Fed to hike more aggressively. However, central bank propers have tended to look through cyclical bumps in inflation and clothes policy more to the longer-term outlook.
Inflation has struggled to reach the Fed’s 2 percent end since the financial crisis.
“The tariff situation is nothing that’s sustainable, it’s not something that’s crave lasting,” said Peter Boockvar, chief investment officer at Bleakley Consultative Group. “I don’t think the Fed is going to respond to tariffs that may not last.”