On Wednesday the Fed cut interest rates 25bps for the first time in more than a decade. A day later Trump announced a further tariff at 10% on Chinese imports, ending the month-long truce in the US-China trade war. In this podcast, Adam Posen, a former central banker, considers the impact of these two moves. The rate cut is strongly related to the definitive shift in the Fed’s approach to economic policy, which now seems to focus on the collective wellbeing of international economic development. Posen explains that Trump’s rash behaviour in the US-China trade war, combined with his apparent disregard for the US consumer, contributes to a pool of uncertainty. He also points out that despite a positive economic outlook, this uncertainty has led to poor quality economic growth in the US. Overall, though, he doesn’t believe there will be another interest rate cut as a knee jerk reaction to the latest slap of tariffs. Posen does, however, bemoan the lack of macroeconomic modelling tools or Fed insight to forecast the effect of these tariffs. Posen reveals that his team is working on building a better model for this.
Why does this matter? While it is true that trade uncertainty is weighing on growth, the Fed has been reluctant to stay on the side-lines. Indeed, in the most recent Fed meeting they cited trade as a reason for being dovish. We wouldn’t be surprised by dovish comments from the Fed in coming weeks.
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