Faced with an inverted yield curve, when long term interest rate drop below short term rates, that usually spells recession, 73-year-old President Donald Trump scrambles to offset an economic slowdown. Whether there’s anything he or Federal Reserve Board Chairman Jerome Powell can do to reverse the economy’s slowdown is anyone’s guess. While it’s true that the federal budget deficit could exceed $1 trillion in 2020, it’s also true that it is a far smaller portion of the total federal budget than when it hit $1.4 trillion in 2009. Whatever downturn looms today it pales in comparison to the Great Recession in 2008, something former Fed Chairman Alan Greespan called one of the nation’s three financial panics since signing the Declaration of Independence July 4, 1776. Talk about federal budget deficits can’t deny that the budget and Gross Domestic Product are far greater today than in 2008.
After nine years of recovery, it’s natural for the economy to hit a slowdown and possible recession. Powell responded quickly July. 30, cutting the federal funds rate for the first time in 11 years. When former Fed Chairman Ben S. Bernanke slashed the federal funds rate to zero-to-a-quarter-percent Dec. 16, 2008, he did so to provide maximum monetary stimulus to prevent another Great Depression. Bernake acted swiftly after Lehaman Brothers went bankrupt Sept. 15, 2008, realizing that other historic brokerage houses, like Bear Stearns, would also go broke. If unemployment kicks up about 2%, it could add 3.5% to the federal budget deficit. J.P. Morgan analyst Jesse Edgerton, the current slowdown might require the Fed to start another round of quantitative easing, buying U.S. treasuries, to add liquidity into the banking sector to keep borrowing strong.
Trump finds himself caught between a rock-and-a-hard-place, trying to get another tax cut out of Congress. What he could do, if he’s really serious about saving his economy, is end the trade war with China. Due to meet with China next week to find resolution to the trade war, there’s nothing that would reassure markets and continue the economic momentum that ending the trade war. Both Trump and Chinese President Xi Jinping need a face-saving way out of the current mess that shaved about one-half-a-percent off U.S. Gross Domestic Product, according to Secretary-General Christine Legard of the International Monetary Fund [IMF]. Trump ranted about Powell raising the federal funds rate four times in 2018, offsetting the effect of Dec. 22, 2017 tax reform, slashing corporate tax rates from 35% to 21%. Trump criticized Powell for hiking rates, offsetting his tax reform bill.
Trump’s best hope of salvaging his currently 2% GDP growth is to end the China trade war sometime soon. He’s accomplished the U.S. objective of getting China to take seriously its theft of U.S. intellectual property. While Trump—and his key economic advisers Larry Kudlow and Peter Navarro—want China to pass legislation making intellectual theft a crime, Xi’s already acknowledged his government’s working on the problem. When Democrats met in San Francisco Aug. 23, House Speaker Nancy Pelosi showed no real interest in pushing for more tax cuts. Hearing for the major party candidates, former VP Joe Biden (D-Del.), Sen. Bernie Sanders (I-Vt.), Sen. Kamala Harris (D-Calif.) and Sen. Elizabeth Warrant (D-Mass.), it’s unlikely Trump would get any consensus on another tax cut. Democrats don’t want to help Trump before now and the 2020 election.
J.P. Morgan analyst Edgerton doesn’t think Democrats would want to throw Trump a bone in an election year. “Perhaps the most crucial question of whether Democratic legislators would support a stimulus bill that could be seen as benefiting President,” Edgerton said. Trump doesn’t need a fiscal stimulus, he needs to end the China trade war, reassuring Wall Street that there’s reason to buy stocks. With the University of Michigan Consumer Sentiment Index falling to six –year low, consumers tend to belt-tighten, leaving GDP sluggish. Whatever tax cut Trump considers, it would be insignificant to ending the China trade war. With farmers reeling from cancelled orders, it’s time for Trump to consider the harm of the trade war on the U.S. economy, not the zero-sum-game of who’s winning-or-losing. Ending the trade war would have an immediate stimulus impact on the economy.
Trump would find many willing partners on both sides of the aisle if he decides to end his trade war with China. Since the prospects of more tax reform are dim between now and the election, it only makes sense for Trump to end the China trade war. Unlike the low prospects to pushing a tax cut through Congress, all agree that ending the trade war is long overdue. Even if Trump faces criticism for ending the tariffs, the benefits to the U.S. economy would be substantial. If Trump waits too long to end the tariffs, he’s not going to turn the economy around before the 2020 election. Since most voters see the economy as Trump’s strong suit, if it heads south, Trump will pay at the polls, no matter what the excuses. Getting Powell to cut interest rates Sept. 17 won’t be enough to turn things around. When Trump looks at his options, only ending the trade war can reverse what looks like an inevitable slowdown.
