How strange is it that at a time of economic growth, record employment and soaring stock markets that the US Federal Reserve is considering an interest rate cut?
At all other times, such a move would be considered counterintuitive at best and possibly even foolhardy.
But if the events of the past few years have taught us anything it’s that there’s no such thing as normal economic times.
The financial crisis presaged quantitative easing on an unprecedented scale and now Donald Trump’s disruption of the established global economic order is bringing back tariffs and putting the brakes on areas of economic activity that might otherwise be powering away.
It’s the right time to do it of course, from his point of view. The US economy is in pretty good shape and has been booked attractive growth rates for several consecutive quarters. European rivals, already disconcerted by the economic and diplomatic onslaught, can only look on with envy.
Across the Pacific there’s China of course, the sleeping giant that’s now slowly waking up. Trump’s tariff policy is beginning to bite there, no question. But there other deep-seated factors that may mean that the coming exchanges in the escalating trade war do not all go America’s way.
For one, the Chinese government is not beholden to an electorate. That the country can tolerate a significant amount of economic pain is clear enough from its own history – witness the Great Leap Forward and the Cultural Revolution.
What’s more, the century of economic exploitation by Americans and Europeans that ran between the 1840s and the 1940s has left a deep cultural impression. The Chinese people are likely to respond well to exhortations to patriotism in response to increased American economic pressure. It will take a lot more pressure than Donald Trump is currently applying for cracks in Chinese social cohesion to start appearing – probably more pressure than he is actually able to apply.
The Fed can see all these dynamics playing out. The FOMC is under immediate short-term pressure from the President himself to cut rates, so there is an immediate short-term gain to be had from a July rate cut, which is what most market participants now expect.
Reading between the lines of the Fed’s most recent communiqué, it seems most likely that that cut will ring in at 25 basis points rather than the 50 conjectured by some. And that moderation of expectations is in turn what lies behind the slight weakening of the gold price over the past couple of days.
All that being said, it’s really just a coincidence that the Fed now wants a rate cut at the same time as Donald Trump. Or to put it another way, there is no sense in which both are now on the same page after a prolonged period of disagreement.
Rather, Trump wants a rate cut to help weaken the dollar against other international currencies. He’s a believer in the so-called currency wars and in his view the US is not fighting hard enough to keep up with the relative devaluations of the Euro and others.
But as far as the Fed is concerned, this is only a secondary factor, one that needs to be plugged into the spreadsheets to be sure, but not one that need drive policy.
What the Fed is concerned about is the effect of Mr Trump’s own trade policies on global trade, and the eventual blow-back that will inevitably come to the US economy. Already growth rates are slowing, although for the time being they are still healthy enough.
But if the pressure on Chinese economic does start to bite then a chill wind will blow through the entire global economy. How much of that calculation has also been made by Mr Trump is unclear.
But for now it looks as though he’s playing the short game and the Fed’s playing the long game.
Given that he’s a politician that’s as it should be. But don’t expect the tension to mitigate after one rate cut or even two. This conflict looks set to run and run.