Trump's Painful Decision on China Echoes Great Financial Crisis
Stealing thunder from a Federal Reserve update, the president made a confounding announcement on a tariff deal.
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In its latest update, the FOMC basically said that the risk of stagflation has risen, with upside risk to inflation and unemployment.
Normally, that would be big news, but just ahead of the 2 p.m. FOMC release, President Trump was quoted as having said that there is no potential to reduce tariffs on China and that China should reassess which side asked for a meeting.
Now that everyone has read “Art of the Deal” and knows about maximum leverage, etc., this is getting painful. Is this art of the deal to take back the “leverage”? Or is he serious? Maybe we have so many good deals in the pipeline, that we can try and isolate China?
Anything seems possible at this stage, though markets seem too complacent to policy at the moment.
I have been arguing that this reminds me of the Great Financial Crisis and European Debt Crisis. In both of those cases, policy makers had to have their feet held to the fire in order to act. They would act, but only at the last possible moment.
Given that this administration seems to be depending on tariffs to shift manufacturing and to generate revenue, we should not be surprised to see ot slow down on the “walk back.” The market has priced in a lot of walk back on tariffs and good deals, but we might be set for disappointment. The administration may be more committed to its view of the benefits of tariffs than markets are. The market is telling it that it is doing a “good job” as we are back to the Liberation Day levels, so maybe they take another swipe – not as aggressive as Liberation Day, but “worse” than the markets are hoping for?
My hopes on good deals and the administration backing off of tariffs have diminished in the past week or so. Today tells me those fears are well founded.
Back to the Fed.
The big question going into Powell’s press conference is whether the Fed will respond to unemployment faster than it does to inflation fears?
In his prepared remarks, he tried to make it clear that the Fed would balance the two. That it would compare and contrast how far they are from goals, and how it is moving. He made it seem like he was in no rush to do anything!
Nothing in the question-and-answer session seemed to come out as overwhelmingly hawkish or dovish.
Maybe neutral was a bit better than expected, but I’d watch out for negative headlines from the administration going forward, more than hoping for positive headlines.
Basically, what I came into the week thinking has proven true, just a touch worse and more negative.
