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Editorial: Trump Gives Investors Reason to Be Scared

  • The Marriner S. Eccles Federal Reserve in Washington. MUST CREDIT: Bloomberg photo by Andrew Harrer.


Friday, October 12, 2018

This week’s fall in stock prices was about as unsurprising as President Donald Trump’s explanation for the setback — “The Fed has gone crazy,” he said. Expect more of the same over the coming weeks and months, as the U.S. economy adjusts to the withdrawal of the Federal Reserve’s post-crash monetary stimulus, and a reckless administration persists in testing investors’ nerve.

Stocks have been generously valued of late, shrugging off bad policy too blithely. The outlook for public borrowing was worrisome even before Washington delivered a fiscal stimulus that an economy at full employment doesn’t need. And Trump’s approach to trade, including the growing prospect of an outright trade war with China, might have been designed to cause maximum economic anxiety.

So far, the harm is to the outlook rather than to actual outcomes. In the short term, the stimulus has added to demand and supported the expansion. And Trump’s threats to raise tariffs and other trade barriers still greatly exceed the changes put in place. He rebranded NAFTA rather than shutting it down, and agreed to a cease-fire of sorts on trade with Europe. Even so, the effects of his new tariffs led the International Monetary Fund to shave two-tenths of a percentage point from its forecast of U.S. growth next year.

The real shift is to the balance of future risks: much less upside, and a truly alarming new downside.

The trade war that Trump seems willing to contemplate would cause enormous disruption to the U.S. economy, many of whose industries have organized themselves around supply chains that extend to China. That kind of dislocation, or a firming belief in such a disaster, is capable of not just trimming growth but also bringing on the next recession. And Washington’s extreme fiscal laxity — deficits of well over a trillion dollars a year loom, with unemployment at just 3.7 percent — means there’ll be little or no scope for strong fiscal expansion to deal with that recession.

In other words, Trump’s death-defying trade-policy stunts are being executed without a safety net. If that doesn’t justify a moderation of the markets’ recent exuberance, what would?

Meantime, it’s true that the Fed is gradually tightening monetary policy, and that this is troublesome for emerging-market economies that relied too much on dollar borrowing. It gives U.S. investors pause for thought as well. But it would be astonishing if the Fed were doing anything else. The Fed has been far from hasty in normalizing monetary policy. Holding interest rates at post-crash lows amid full employment and after nearly a decade of growth, as Trump evidently would prefer, really would have been crazy. And the Fed has taken pains throughout to advertise its gradual policy adjustment in advance.

Perhaps Trump deserves some credit for making it so hard to take what he says seriously. If a normal president had blamed an “out of control” Fed for tanking markets under these circumstances, investors would have been disturbed: After all, it might mean something. In Trump’s case, one shrugs and moves on.

For now, anyway. If investors’ mood darkens and Trump’s efforts to scapegoat the Fed escalate, all bets are off.

Bloomberg View