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Fed Forced To Clean Up Trump’s Trade War Mess

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Over the last year and a half, the Fed has consistently cited president Trump’s aggressive trade policies as one of the key risk factors to its outlook.

In fact, in the last year, Trump’s relentless tariff campaign against China took a heavy toll on world growth. Many central banks, as well as independent organizations, such as the IMF and the OECD, have warned against the damaging cost of such trade wars. 

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And when Trump and Chinese leader Xi JinPing agreed to a truce at the November G20 meeting last year, the relief was palpable in the markets.

Faded Optimism

Between December 2018 and March 2019, Trump postponed the imposition of fresh tariff increases while both sides engaged in trade negotiations to deliver a deal. During the course of these negotiations, global growth improved. Sentiment among many central banks began to shift back towards further policy normalization.

Fresh Tariffs From Trump

However, despite reports of solid progress which led Trump to postpone the original March 1st deadline, talks eventually failed.

In May, Trump announced fresh tariffs on $200 billion of Chinese goods which increased from 10% to the 25% originally planned. Trump cited that China was simply taking too long to agree a deal as a reason for the new tariffs. He also accused them of trying to “backpedal” and renegotiate as they got closer to signing a deal.

China Launches Fresh Tariffs Also

In retaliation, China responded with tariffs of its own on $60 billion of US goods. The Asian giant said that it would not back down in the face of US aggression. Trump then announced that he was considering taxing the remaining $300 billion of Chinese goods entering the US each year. This threat intended to hang over the Chinese as a final deterrent.

Trump Bans US Firms From Dealing With Huawei

Alongside the more explicit developments in the trade war, there have been other aspects which have equally damaged relations. Shortly after the introduction of the new tariffs, Trump announced that he had added Chinese tech firm Huawei to the “Entities List.”

The list includes 44 companies prohibited from dealing with US firms without prior government approval. The move was a massive blow to Huawei. Leading firms such as Google announced that they would be winding down dealings with Huawei accordingly.

China Reacts With Rare Earths Threat

However, once againChina made good on its promise not to back down. The market was rocked by reports that China was threatening to place restrictions on exports of rare earths as leverage in the ongoing trade war. These materials are used in many high tech appliances. And with China dominating the global supply, such restrictions could be crippling for US firms.

US Firms Urge Trump To Backdown

Needless to say, the markets, businesses, and consumers have not received this outbreak in tensions well. The latest data showed US manufacturing last month hitting a ten year low as trade war fears once again gripped producers.

As evidence of this fear, 600 US companies presented Trump with an open letter urging him to stop the tariffs. Headlining the letter was Wallmart, explaining to the president that his tariffs were, in fact, hitting US businesses and consumers, not China.

Fed Policy Outlook Has Shifted

The negative impact of Trump’s escalating trade wars has fuelled a sharp shift in sentiment from the Fed. Following a spate of tightening last year and initial expectations of further tightening this year, the Fed’s language has dramatically altered over recent months.

Just last week, Fed chairman Powell warned that the bank would be ready to act to backstop the economy should any further weakening occur as a result of the trade war. Indeed, where the market was initially looking for a rate hike later in the year, it is now pricing in a rate cut.

Powell In A Difficult Position

This shift in approach will likely be a difficult one for Powell. The chairman has come under heavy personal criticism from Trump over his desire to continue with gradual policy tightening. Powell is now quite simply in a very difficult position. On the one hand, he needs to clear up the mess made by the President. On the other, he is still being forced to give in to Trump’s demands.

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