How The Federal Reserve Just Proved It’s Right And Trump’s Wrong

Federal Reserve Chair Jerome Powell announces Coronavirus-related rate cut

Half point interest rate cut to temper the economic effects of Coronavirus might not have been possible if they’d cut willy-nilly like Trump always wants

The problem with the President’s favored policy of slashing the heck out of interest rates just as a favor to already booming businesses, is it doesn’t give you much flexibility if there’s an emergency down the road and you really need to cut rates then. Like now. Rate cuts are one of the best weapons to battle an economic slowdown. Trump’s advocated for a full point rate cut without an emergency, double what the Fed just did in response to an actual one.

Eventually there’s always going to be something urgent and bad cropping up. Which is why the Fed needs to exert excess caution if anything, and needs to operate independent of the President.

Trump’s “solution” of heading toward and even embracing negative interest rates is so not a wise option. Trump likes the “magic” of the concept: investors paying him to hang onto their money. But negative interest rates are hardly ever a sign of a robust economy. Most of the time they mean investors are so unsure of anything, they’re willing to pay the government a little to keep their cash for a while. Or that other investment options would likely result in a more severe loss of assets. And again, if a surprise or an emergency or a disaster comes along, the central bank then has nowhere to go.

As Federal Reserve Chair Jerome Powell explained previously, as Trump was browbeating him:

We’re always going to do what we think is the right thing, we’re never going to take political considerations into account or discuss them as part of our work. We’re human, we make mistakes, but we’re not going to make mistakes of character or integrity.”

We’ll keep reminding you Trump himself appointed Powell. He could’ve kept the previous Fed Chief, Janet Yellen on. And turns out, based on statements she’s made, might’ve been at least a little more on board with Trump’s interest-rate cutting game plan. But Trump let her go and brought in Powell because “you like to make your own mark” .

Anyway, even with a key interest rate cut to 1.25% from 1.75%, the stock market closed sharply lower yesterday, after rallying strongly the day before. Because this may not be a situation lower interest rates can totally fix. Also, as Fed Chair Powell made this very clear during his news conference, no impact has shown up yet in any regularly reported and monitored economic data. So the Fed doesn’t really know what it’s dealing with yet. Only the anecdotal information it’s getting from various industries.

Global supply chains are already totally screwed up. The most glaring example of which may be the near complete unavailability of protective masks in the U.S. A big reason? Many of those masks are made in China, which isn’t making as much of anything these days, as much of its manufacturing heartland remains on virtual lockdown. Our friends in Thailand and Japan say they still have easy access to masks, although the price has gone up. People in those countries more typically wear masks in public especially during cold and flu season, so there’s probably more inventory to draw from in those places. (And we hope that practice catches on in the U.S. even after this ordeal is over.)

We also think many people don’t realize how big a driver tourism has become to the global economy. According to the World Travel and Tourism Council, (which we realize may have an interest in making that industry look particularly robust):

  • Tourism now accounts for 10% of “global economic activity”
  • Has grown at a faster pace than the global economy as a whole nearly every year in the past decade
  • Is the second fastest growing global industry after manufacturing

On top of that, tourism by Chinese citizens, which has almost completely dried up as a result of the Coronavirus, had been soaring to unbelievable heights. 40% of Chinese citizens currently hold a passport, about the same as Americans, even though median income in China is about 6X lower than the U.S. And Chinese tourists made 150-million overseas trips in 2018, 62% more than Americans (and more than 1/2 the trips by Americans are to Mexico and Canada).

That loss of Chinese tourists is at least several hundred billion dollars out of the global economy right there. Chinese tourists are by far the biggest spenders overseas of any nationality. A lot of which typically flows to the U.S.

Fed Chair Powell in remarks that came along with the rate cut, insisted “the U.S. economy is strong and we will get to the other side of this”. But no doubt it’s going to continue to take some blows, some unavoidable now.