Thursday, September 5, 2019

The Federal Reserve, Interest Rates and Trade War - What's the Best Response?

The trade war with China and recent inversion of interest rates for short term vs. long term bonds has elevated debate within the Federal Reserve on how to adjust interest rates. Responding to President Trump’s tariff increase China recently devalued its currency to make its exported products less expensive for US markets. President Trump has been critical of Fed Chairman Powell and maintains that interest rates should be lowered to counter currency manipulation by China and to continue stimulation of the US economy. The adjustment of interest rates by the Federal Reserve has traditionally been used as a means of controlling US inflation, stimulating production/consumption and thus stabilize/enhance economic growth and employment. This concept is not new. Government intervention in market economies results from theory pioneered by British economist John Maynard Keynes during the 1930s. Known as Keynesian economics the technique of active money/market management is employed by the Federal Reserve and central banking systems throughout the world.

To date the Federal reserve has adjusted interest rates to maintain the US economy but has resisted rate adjustments as a means of responding to global currency manipulators and tariff/trade issues. Chairman Powell should consider the expansion of the Fed’s interest rate tool set to address trade/tariff issues providing a more dynamic response to both domestic and global economic environments. Greater control of process parameters is a good thing.

As for criticism of Chairman Powell by President Trump; maintain the Fed’s independence but get used to the heat. The President is criticized daily by the media and Congress. If someone has a better idea speak up. 

Best regards to all,
Thomas D. Jay

Semiconductor Industry Consultant
Thomas D. Jay YouTube Channel

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