Special Briefing: Can the Fed Keep the US Economy Straight?
WHY YOU SHOULD CARE
Because there may be no good options.
By OZY Editors
This is an OZY Special Briefing, an extension of the Presidential Daily Brief. The Special Briefing tells you what you need to know about an important issue, individual or story that is making news. Each one serves up an interesting selection of facts, opinions, images, and videos in order to catch you up and vault you ahead.
WHAT TO KNOW
What happened? This week, the U.S. Federal Reserve cut the interest rate by a quarter-percent for the first time since the global financial crisis. It was aimed at cooling the pressures caused by the global economic slowdown and the ongoing trade war between Beijing and Washington — which worsened yesterday after President Donald Trump unveiled new tariffs on another $300 billion worth of Chinese imports. With the American economy struggling to continue its largest expansion in U.S. history (it’s been growing since June 2009), the Fed under Chairman Jerome Powell is faced with few good options to help keep things humming along.
Why does it matter? The central banker is no stranger to criticism from Trump, who wanted a bigger rate cut and tweeted this week, “As usual, Powell has let us down.” Powell has now been sucked into fighting short-term concerns, reacting at least in part to Trump policies. But since the dollar is still rising and inflation remains low, it’s unclear whether that’s a viable long-term strategy, as it potentially reduces the bank’s room to maneuver when a U.S. economic slowdown actually hits. While arguably necessary, this week’s cut could set off a risky chain of events, which is why balancing destabilizing policy with sound economic judgment is more important — but also more difficult — than ever.
HOW TO THINK ABOUT IT
“Powell’s pirouette.” That’s what some have called the Fed chief’s gradual easing of an interest rate that’s been rising since 2015. The reduction was not only an answer to lower inflation and sagging business investment but also insurance against a weakening global economy and potential blowback from continuing trade turmoil. By keeping a finger on the pulse of world economic growth — or lack thereof — the Fed under Powell is displaying a level of global awareness that clashes with an increasingly inward-looking Trump administration. With the European Union’s quarterly growth at a mere 0.2 percent, the European Central Bank is set to apply a stimulus of its own, likely followed by other central banks around the world. But that could start a dangerous cycle: The Fed could feel pressured to continue cutting just to keep the U.S. dollar from getting too strong.
Maximum pressure. Powell’s remaining vague on whether future cuts are in store clearly angered Trump. Meanwhile, some have described the Fed’s cut as “caving” to pressure from the president to juice the economy. Whether or not that’s the case, the stakes are high, with one expert equating Trump’s approach of confronting China while demanding low interest rates to “shooting yourself in the foot just to get another dose of morphine.” Meanwhile, there’s plenty of consumer confidence to lose, and keeping up record-low unemployment — the U.S. added 164,000 jobs last month — likely won’t be easy.
A Fed apart? More broadly, observers say the central bank is opening up to an unprecedented degree. Its regional branches are promoting their research, and officials are reportedly setting off on campaigns to connect with ordinary workers in a bid to show they’re listening. Could it be a political calculation to curry support as the Fed increasingly comes under fire from Trump? Sure, but talking more frequently about issues like income inequality could earn the institution more street cred from the public. “You have to know what their experiences are if you’re actually going to serve them,” Mary Daly, president of the Federal Reserve Bank of San Francisco, recently told The New York Times.
Eyes on the prize. But even as the central bank tries to gain credibility with ordinary Americans, it faces a dilemma: By racing with other central banks to keep interest rates so low that it can help inflation grow, the Fed risks backing into a corner, in which it has few options to cut rates further if there is an actual slowdown — or worse, a recession. Trump is already upset with the Fed, but a failure to give itself options for a recession could upset ordinary Americans too, when the economy hits bad times.
WHAT TO READ
How Donald Trump Is Sanctioning the US Economy, by Daniel W. Drezner in The Washington Post
“Trump, in starting trade war after trade war, has made himself the uncertainty engine for those interested in investing in the United States. And the effects are starting to be felt.”
This Good Sign for the US Economy Could Be Bad for Your Paycheck, by Brittany De Lea on Fox Business
“[T]he booming economy, complete with a low unemployment rate, draws workers back from outside the labor market. One potential side effect this can have? Dampening wage growth.”
WHAT TO WATCH
Investors Split on the State of the US Economy
“I think one thing we need to remember is that GDP is a very much backward-looking figure.”
Watch on Bloomberg Markets and Finance on YouTube:
Amid Long Economic Expansion, Why So Many Americans Are Still Struggling
“The strength of the economy right now really provides an opportunity to sit back and say, ‘OK, we can look at the panoply of economic policies and figure out … what we could be doing to address these fundamentals.’”
Watch on PBS NewsHour on YouTube:
WHAT TO SAY AT THE WATERCOOLER
The Last Frontier. Of all 50 states in the union, Alaska was the only one to record a drop in GDP last year, having posted -0.3 percent growth. Washington, meanwhile, boasted the highest growth rate, with +5.7 percent.
- OZY Editors, OZY AuthorContact OZY Editors