Monday Moneybeat: Trade war armistice

MARY REICHARD, HOST: Coming next on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: President Trump managed last week to erase two long-running uncertainties holding back the economy: one, an unratified North American trade agreement, and, two, the China trade war.

The trade-war armistice came just days before it was set to escalate with new tariffs on $160 billion worth of goods Americans source almost exclusively from China: goods like laptops, smartphones, video-game devices, clothing, and children’s toys.

But those import taxes are not taking effect, and that’s thanks to a nine-chapter agreement announced on Friday. Other U.S. tariffs put in place earlier will start to roll back.

For its part, China agreed to delay retaliatory tariffs on American cars. It also pledged to stop demanding that American companies divulge trade and technology secrets in exchange for access to the Chinese market. Beijing also committed to the purchase of an estimated $40 billion in American farm products over the next couple of years.

This is not a resolution of every complaint President Trump had made about China: he’s still not satisfied with government subsidies for Chinese industry and Beijing’s alleged currency manipulation. Those disagreements will have to await the next round of trade negotiations.

REICHARD: Also last week, Democrats controlling Congress said they’re okay with President Trump’s new trade pact for North America. So is the labor group AFL-CIO and the business group the U.S. Chamber of Commerce.

The U.S.-Mexico-Canada Agreement, the USMCA, is now as certain to pass in the Democratic-controlled House as are the two articles of impeachment. Unlike impeachment, though, the USMCA has a chance to pass the Senate and take effect.

EICHER: A third straight winning week for the index of blue-chip stocks, the Standard & Poor’s 500. Both the S&P 500 and the tech-heavy Nasdaq indexes set record highs on Thursday and Friday of this week, following the trade truce. They ended the week up seven-tenths and nine-tenths respectively. The Dow Jones Industrials picked up four-tenths of a percentage point. The Dow sits just one-tenth of a percent off its all-time high set last month.

REICHARD: As we talked about last week, the Federal Reserve acted as expected. That is, the central bank decided to leave interest rates where they are. And that federal-funds rate is now in a range of one-and-a-half to one-and-three-quarters percent. That’s very low when you take into account the Fed’s history of setting rates. In the five decades starting in the 1960s, the federal-funds rate averaged almost 6 percent. 

Big shocks to the economy prompted the Fed to slash the rate: the 9/11 terror attacks, for example, and the Great Recession of 2007. From about 2008 on, the central bank maintained the rate at near zero during the entirety of President Obama’s two terms.

EICHER: The Obama economy bounced along in fits and starts. It alternated between gangbusters 5 percent growth rates and periods of no growth or economic contraction. It didn’t grow steadily until about the beginning of 2016. 

After the election of President Trump, the Fed steadily increased rates, in search of a rate considered neutral: that is, one that neither inhibits nor stimulates the economy. 

Congress has given the Fed a dual mandate: set monetary policy in such a way (1) as to help promote maximum employment and (2) to achieve price stability.

The belief is that the two can work against each other: policies that achieve low unemployment can provoke too-high inflation, so when businesses are hiring, the Fed tends to push up interest rates to cool the economy and stave off inflation.

But now the Fed seems to be coming around to the view that inflation will remain tame, even as the economy keeps growing and the job market remains solid. At his news conference last week, Fed chairman Jay Powell said as much.

POWELL: Inflation is barely moving up, notwithstanding that unemployment is at 50-year lows and expected to remain there. And by the way it’s a good thing that you know, we think we’ve learned that unemployment can remain at quite low levels for an extended period of time without unwanted upward pressure on inflation. In fact, we need some upward pressure in inflation to get back to 2 percent.

As if on cue, the Labor Department released its producer price index, a reliable gauge of inflation. This is a survey of prices at the wholesale level, before goods actually reach the consumer. The index was flat November over October, and year-on-year, prices are up just 1.1 percent—indicating as Chairman Powell said, that inflation remains well under control.

And that is today’s Monday Moneybeat.

(AP Photo/J. David Ake) The headquarters of the Federal Reserve Bank is seen at sunrise in Washington Saturday, May 24, 2008. 

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