Today I have seen a lot of news stories implying that President Trump somehow lost his nerve when it comes to a trade deal with China. The narrative goes that by delaying, and in some cases removing, the implementation of the additional 10% tariff's on Chinese goods, that President Trump has shown China that the President is not willing to allow the stock market to decline any further and China in turn could/will use that to negotiate a better deal for itself. I however would like to propose a different narrative.
It is no secrete that the President really wants the Fed to cut interest rates. It is also no secrete that the economic data is extremely mixed, i.e. low unemployment and strong consumer demand vs week manufacturing and soft housing. In fact the justification given by the Fed for cutting rates last month is the consistent weakness in inflation. So, it would stand to reason that if inflation was running closer to the Fed's 2% mandate, the rate cut the President wanted so badly would not have happened.
The tariffs that were set to go into effect on September 1st were mainly on consumer items such as electronics and apparel. By enacting those tariffs, President Trump would have effectively caused inflationary pressure on the items consumers actually buy. It is conceivable that the additional tariffs would cause inflation to at least reach the Fed's mandate of 2%, reducing the likelihood of a rate cut, or even surpass the 2% threshold, which could facilitate the need for a rate increase. Instead the President delayed the implementation of additional tariffs until after the last Fed Open Market Committee meeting of the year.
Whether correct or not, delaying the tariffs was political gamesmanship which basically forced the Federal Reserve into cutting rates. Today's announcement had nothing to do with China and everything to do with the Fed.
Jeffrey Lampley, Esq.
I am attorney in Southwest Florida who practices in the areas of Business Law and Bankruptcy. This Blog is a combination of useful information and my thoughts on life. Enjoy.