The biggest risk to longest running U.S. economic expansion, now in its eleventh year, is none other than the man in the White House, according to Mark Zandi, chief economist at Moody’s Analytics.
“President Trump is the biggest existential threat to the record U.S. economic expansion,” Zandi tells ThinkAdvisor.
His “upside-down economic policies,” including a trade war with China, which Trump says will expand on Sept. 1, and “massive deficit-financed tax cuts” at a time when unemployment was already very low have unnerved businesses and “thrown the Federal Reserve off course,” according to Zandi.
Fed Chairman Jerome Powell admitted as much in the press conference last Wednesday following the Fed’s first rate cut since the financial crisis.
“Trade is unusual,” said Powell in response to a reporter’s question. “It’s something that we haven’t faced before and that we’re learning by doing … with trade we have to react to the developments, and we don’t know what they’ll be.”
A day later Trump announced plans to slap an additional 10% tariffs on $300 billion of Chinese imports on top of the 25% tariffs already levied on $250 billion worth of Chinese imports. If Trump sticks with his latest plan, essentially all Chinese imports into the U.S. will be subject to a tariff.
The Chinese government, which has already levied tariffs on about $110 billion in imports from the U.S., vowed to respond to the new levies but gave no specifics.
Trump has also renewed threats to impose U.S. tariffs on European auto imports.
Trade tensions “do seem to be having a significant effect on financial market conditions and on the economy,” said Powell at his press conference, noting that trade uncertainty, slowing global growth and muted inflation below the Fed’s 2% target were the reasons behind the Fed rate cut. He called the rate cut a “mid-cycle adjustment” and “not the start of a series of rate cuts.”
But by Friday the financial markets weren’t buying that outlook, according to Collin Martin, director of fixed income at the Schwab Center for Financial Research.
“An additional round of tariffs could potentially slow the U.S. growth even more than expected,” leading to additional Fed rate cuts, Martin explains.
By the close of trading on Friday, the S&P 500 was down 3.1% for the week, posting its worst performance since December, and the 10-year U.S. Treasury note fell to 1.864%, its lowest level since the day before the 2016 presidential election.
Fed fund futures were pricing in 97% odds of another 25-basis-point Fed rate cut in September and roughly 50% odds of another same-sized cut in October or December, according to the CME FedWatch Tool.
“The Fed won’t tolerate an economic slowdown while President Trump is determined to “win” the trade war,” wrote Bank of America Securities Economists Michelle Meyer and Alexander Lin, in their latest weekly report. “The risk is that we end up with an ever-escalating trade war matched by an ever-lower fed funds rate. It is a dangerous adverse feedback loop.”