Can the Fed save us from trade taxes?

Posted by: Paul Donovan

05 Jun 2019
  • US Federal Reserve Chair Powell signalled the Fed could ease policy if the costs of US trade taxes become too high. Trade taxes impose three costs: 1) directly via fiscal tightening and higher prices; 2) indirectly via uncertainty, reducing investment and adding risk; 3) indirectly, as lower investment slows global manufacturing and trade.
  • The Fed can offset direct costs relatively easily. The Fed might be able to offset uncertainty and a risk premium for investing in the US, but that is more difficult. The Fed has less ability to act on the global costs – that is up to other central banks.
  • Ultimately the Fed can blunt the impact of a slowdown from trade taxes. It probably cannot stop a slowdown from trade taxes. Global growth is likely to be below trend this year (it was likely to be trend, absent trade taxes). However, Fed action would be able to reduce the risk of recession.
  • The Europeans are giving April producer prices and retail sales figures. The limited number of data releases and the extremely late publication of data may be why the Euro area seems less significant an economy than it really is. Some opinion polls on sentiment are also due.

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