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2008 Redux?

FP Interrupted

How is “America First” doing? Well, it’s prompted the US Federal Reserve to cut interest rates this week, a quarter of a percent. The “Fed” is America’s central bank, tasked with watching over money. Among its priorities is to keep inflation in check and employment high. Its main tool: interest rates. Cutting rates, more money is available, because borrowing costs are low. More money, in theory, means more economic activity. That’s good, right? Not in this instance.

Fed chair, Jerome Powell, who has been skeptical of rate cuts in a healthy economy, said the rate cut on Wednesday was necessary because of “weak global growth and trade tensions.” Yeah, America First. Trump’s trade war with China and his propensity to level tariffs at countries (including India, South Korea, Japan, and the European Union) has hurt business confidence.

Trump has long been berating the Fed, which is an independent body, to cut interest rates significantly. (So, you guess it, he’s not happy with the quarter of a percentage cut.) The last rate cut, before Wednesday, was in 2008, during the financial crisis. Janet Yellen, Powell’s predecessor and the first woman to hold the job, raised rates during her tenure, which ran from 2014-2018. (That prompted Trump to call her “crazy.”) Yellen’s rationale was that in a healthy economy, the Fed’s job was to tighten monetary policy, that is reduce the flow of available money, in order to prevent “overheating,” or inflation.

Wednesday’s rate cut is intended to counter the economic slowdown and avoid the economy from going into recession. The trouble is, pumping free money into the system might just cause a “bubble” and, thereby a financial collapse, which might get us there anyway.

More on the Fed’s cuts and trade: 

  • The Fed’s real message: Save the economy from Trump and his trade war. Victoria Guida and Ben White report. (Politico)
  • Trade tensions are strangling American manufacturing, says the always insightful Megan Greene. (FT) Megan also looks at the question of why the Fed is cutting rates. (FT)
  • The Fed cut rates. Will anyone notice? Allison Schrager dives in. (Quartz)
  • Trump slaps 10 percent tariff on $300 billion more in Chinese goods. Lucy Bayly reports. (NBC)
  • What are the dynamics in the US-China trade war? Elmira talked to Ann Lee back in February, but very on point today. (Project Syndicate)
  • China’s next step with Trump new tariff threats? Yen Nee Lee discusses. (CNBC)

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