On Monday, the President defied critics by reaffirming his commitment to the steel and aluminum tariffs his administration announced last Thursday. Mr. Trump continued to make waves after the announcement by indicating support for the potential trade war the tariffs could cause, a stance he has yet to walk back as well. Most policy analysists—and people with a basic understanding of modern economics—believe the tariffs will hurt the economy, knocking it into the long-overdo recession many economists are predicting. And if the tariffs go into place in the next few weeks, the Federal Reserve won’t be ready.
The current interest rate, though rising, is effectively negative when adjusting for inflation. The government is still paying people to borrow money, and the state of our economy reflects that. So current Chairman Jerome Powell (read his profile here) is expected to raise those interest rates multiple times over the next two years to put the brakes on a fast-overheating economy. But if the new tariffs spark a recession, the kind that sends consumer confidence, unemployment, and price levels spiraling out of control, the Fed will have little time or space to react.
In prepared remarks to Congress before the tariff announcement, Chairman Powell calmed market fears by affirming that the central bank plans to stick to the plan of gradual rate hikes it announced earlier this year. But the new tariffs might change that. It is now a race against time as the abrupt and unexpected change might accelerate or even instigate the coming of a recession. If that happens with the current 1.5% interest rate yielding little room to be further lowered, the Fed will be woefully ill-equipped to mitigate the potentially catastrophic losses of a severe depression.
The President, of course, expects the economy to persevere; by finally putting American steel and aluminum companies on par with their state-subsidized competitors overseas, he believes the jobs and domestic demand created will far outstrip any economic concerns. But with a potential trade war on the horizon, and an economy that appears to have reached a precipitous maximum capacity, it’s only fair to ask that the President and the Federal Reserve get on the same page about the economic future of our country.
You can read more work by Anthony here, on The Politics Beat