Dancing around the China Trade War, 73-year-year-old President Donald Trump said he didn’t need to complete a trade deal before the 2020 presidential election. While Trump doesn’t think he needs the deal, the U.S. economy needs it urgently, or face possible recession during an Election Year. Any hint of a slowdown or recession on Trump’s watch would no doubt sabotage Trump’s attempt at a second term. When Federal Reserve Board Chairman Jerome Powell spoke after cutting the federal funds rate 25 basis points July 31, he said there were economic forces beyond the Fed’s control, namely, the U.S. trade war with China. When Powell cut interest rates another 25 basis points Sept. 18, he said, in effect, the ball was in Trump’s court. Trump and Powell have been going back-and-forth about interest rate cuts, with Trump saying recently Powell should cut them to zero.
Trump blamed Powell for hiking interest rates four times in 2018 putting a damper on U.S. Gross Domestic Product [GDP] that hit for a brief time in 2019 2.9%. Trump hoped after his historic Dec. 22, 2017 tax cuts that the economy would boom in 2018, hoping for 4% GDP. When that didn’t happen, Trump blamed Powell for hiking rates without the inflation data needed to justify to tightening monetary policy. Fed’s Open Market Committee [FOMC] doesn’t cut interest rates unless it’s clear by all available metrics that the economy needs monetary stimulus. Trump suggested to Powell to slash rates to zero, level former Fed Chairman Ben Bernanke initiated Dec. 8, 2008 at the height of the 2008 Great Recession, indicates Trump sees the economy in danger. Yet when you listen to Trump on the campaign trail, you’d think the economy was booming, in no need of rates cuts.
Powell’s move to cut another 25 basis points Sept. 18 showed the Fed is also worried about GDP, not to the extent Bernanke was in 2008. “I’m mot looking for a partial deal, I’m looking for a complete deal,” Trump said, meeting with Australian Prime Minister Scott Morrison at the White House, responding to questions whether or not he needed to end the U.S.-China Trade War or risk recession in 2020. When Powell tells Trump the economy is in his court, he’s telling him to resolve the imponderables related to the China Trade War, because there’s nothing the Fed can do to change it. Trump asked for more tax cuts Aug. 20, realizing it’s not going to happen with a Democratic-controlled House. When Trump speculated about more Fed rate cuts, he was looking for any stimulus he could get for a sluggish U.S. economy. But by far the biggest stimulus Trump could provide is ending the U.S.-China Trade War.
Trump says voters understand his “spat” with China but can’t account for the fact the economy’s been slowing down, whether or not that was aided by Powell. Whatever the reasons, the Washington-based International Monetary Fund [IMF] Secretary-General Christine Legarde estimated that the world economy lost $455 billion or one-half percent GDP. Trump’s kidding himself thinking that voters understand his “spat” with China or anything else, other than daily pocketbook issues. If voters see the economy slowing down or in recession in 2020, they’ll be merciless with Trump on Election Day. Conceding that striking a deal with China “would probably be positive” for his campaign, Trump hinted at things to come. While Trump talks tough today, his trade representative Robert Lighthizer is busy preparing the groundwork for an eventual deal when U.S. Chinese delegations meet in October.
Trump won’t admit publicly that his reelection is contingent on a robust economy in 2020. Since all other economic stimulus has been ruled out, his only chance at stimulus is ending the trade war. Talking tough out loud about China, Trump hopes to put Lighthizer in the position to negotiate the best deal in October. But Trump must realize that voters aren’t interested in reasons why the economy has slowed down or might head into recession. Voters are only interested in what have you done for me lately. When it comes to the economy, if Trump really wished Powell would slash the federal funds rate to zero, then the least he can do to end the China Trade War. Powell said it more than once that the Fed has no control over extraneous drags on the U.S. economy, especially Trump’s Trade War. If Trump wants more economic stimulus, he knows what to do.
Building drama for an historic ending to the U.S.-China Trade War, Trump hinted he’s ready to end the battle, that’s hurt both economies, not just China. “China is being affected very badly. We’re not,” Trump said, trying to save face of what most economists see as a complete waste of time. Trump can’t tell soybean, corn or wheat farmers what to do with their rotting crops, when China refuses to buy U.S. agriculture to retaliate against the current Trade War. Whether Trump admits it or not, his trade war with China hurts the U.S. and global economy, since so much manufacturing goes through China. Any slowdown it China, hurts the bottom line of companies manufacturing in China. Instead of playing a zero-sum-game with China, Trump should look for a compromise deal, giving himself and China a face-saving way out of the current Trade War.
