White House decision to impose tariffs on steel and aluminum imports raises concern that a broader protectionist trade policy may be in the offing
.. Low interest rates have long been a justification for stocks’ lofty valuations, and investors say higher rates will make equities less attractive as borrowing costs and Treasury yields rise.
.. Despite the retreat, the Dow is still up 34% since its election day close in 2016.
.. He thinks the prospects of a trade war are very small and that when the market realizes that, stocks will bounce back again.
.. European officials raised the prospect that they would challenge the tariffs at the World Trade Organization and could impose their own tariffs. Canadian officials also said they would “take responsive measures” against the U.S.
.. “I believe these tariffs on their own will push inflation higher, and higher inflation is a threat to the valuations of more or less all financial assets today,”
The Macroeconomics of Trade War
diverting demand equal to 3 percent of GDP from foreign to domestic products would not increase US output by 3 percent relative to what it would have been otherwise, let alone the 4.5 percent you’d expect if there’s a multiplier effect. Why? Because the US is close to full employment.
.. a 3 percent rise in output relative to trend would reduce unemployment about 3 times that much, 1.5 percentage points. And that just isn’t going to happen.
.. What would happen instead is that the Fed would raise rates sharply to head off inflationary pressures (especially because a 20 percent tariff would directly raise prices by something like 3 percent.) The rise in interest rates would have two big effects. First, it would squeeze interest-sensitive sectors: Trump’s friends in real estate would become very, very unhappy, as would anyone who is highly leveraged (hello, Jared.)
.. Second, it would drive up the dollar, inflicting severe harm on U.S. export sectors. Greetings, farmers of Iowa!
So protectionism wouldn’t do very much to reduce the trade deficit, even if other countries didn’t retaliate, and would inflict a lot of pain across the economy. And that’s without getting into the dislocations caused by disruption of supply chains.
.. Add in the fact that other countries would retaliate – they’re already drawing up their target lists – and the fact that we’d be alienating key allies, and you have a truly terrible, dumb policy idea. Which makes it quite likely, as I see it, that Trump will indeed follow through.
The Durability of Inflation Derp
OK, so some economists got it wrong. That happens to everyone, unless you’re too cowardly to make any testable predictions at all. But what you’re supposed to do when things don’t play out as you predicted is (a) acknowledge the mistake (b) try to understand what went wrong (c) revise your framework in an attempt to avoid making the same mistake again. I think I can fairly claim to have followed these rules.
What’s striking about the economists who predicted runaway inflation in 2009-2011 is that as far as I can tell none of them has even gotten to step (a), acknowledging their mistake
.. And so today we have Marvin Goodfriend, nominated to the Fed board, simply refusing to answer questions about why he thought inflation was about to explode and reducing unemployment was impossible:
Fed’s New Chief Will Confront an Old Problem: An Incipient Asset Bubble
With stock and property prices once again setting records, Jerome Powell may face some agonizing trade-offs
What if low inflation calls for low interest rates but those low interest rates make an eventual, destructive asset bust more likely? Should he lean against an incipient bubble by raising rates faster now, or plan to mop up the mess if assets collapse later?
.. no divine coincidence dictates that the same interest rate will achieve both 2% inflation and a stable financial system.
.. Before the global financial crisis, they concluded no: pre-emptively pricking bubbles seemed much riskier than letting them burst of their own accord. They are less dogmatic now.
.. In a 2015 speech, he said: “Tighter monetary policy might eventually be necessary” if dangerous risk-taking reappeared. A year ago, he went further: “The current extended period of very low nominal rates calls for a high degree of vigilance.”
The case for vigilance has only grown since.