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Good morning! Today we look at President Trump’s interest-rate lament, China’s currency, the first big change to foreign-investment rules in a decade, auto tariffs, manufacturing’s shifting politics, and the White House’s new estimate on deficits.
I AM NOT HAPPY ABOUT IT
President Donald Trump delivered a rare presidential critique of the Federal Reserve, saying he hoped the central bank would stop raising interest rates. “I am not happy about it,” Mr. Trump said. Central bankers have long argued for independence from political pressure, saying it gives investors greater confidence that officials will make unpopular decisions in the long-run best interest of the economy, Nick Timiraos writes. And for the past few decades, presidents have refrained from speaking specifically on monetary policy.
So what? Mr. Trump’s comments appear unlikely to sway the Fed’s rate-setting decisions. But they could backfire, first by pushing the central bank to affirm its independence with a rate increase; second by calling the Fed’s independence into question if it decides the data merit a slower pace of rate increases.
SERIOUSLY, WHY?
In a presidency that has seen institutions from the FBI to the Supreme Court consumed by division and controversy, the Federal Reserve is a shining exception. President Trump’s nominees are widely seen as competent, careful and apolitical. Mr. Trump’s lengthy riff on interest rates Thursday risks tainting that. This isn’t just a problem for the Fed, which wants its decisions seen as driven entirely by economics and data. It’s a problem for Mr. Trump. Inserting himself into monetary policy has virtually no upside and plenty of downside. To top it off, his complaint is baffling. No president since the 1950s has simultaneously enjoyed such a strong economy and such cheap credit. - Greg Ip
Reminder: Mr. Trump tapped Fed Chairman Jerome Powell last November to succeed Janet Yellen. Powell took his post in February.
WHAT TO WATCH TODAY
The St. Louis Fed’s James Bullard speaks on economic and monetary policy at 8:20 a.m. ET.
Canada’s consumer-price index for June is out at 8:30 a.m. ET.
TOP STORIES
CHINA WEAKENS YUAN
One of Mr. Trump’s complaints: Rising interest rates have caused the U.S. dollar to strengthen against other currencies. But the Fed is only part of the equation. Following the president’s comments, China weakened the yuan by the most in two years. Concerns about Chinese growth and an escalating trade conflict with the U.S., plus the prospect of diverging interest rates in the two countries, have weighed on the yuan. In the past month through Thursday’s close, it has fallen 5.3% against the dollar and 3.5% against a broader basket of its trading partners’ currencies, Saumya Vaishampayan reports. A weaker yuan can erase the effect of U.S. tariffs by making Chinese goods cheaper in the U.S. The shift also makes U.S. goods more expensive in China, which would likely widen the trade deficit.
Congress is poised to strengthen the procedures for vetting both foreign investments in the U.S. and overseas transactions involving cutting-edge American technology. The Senate and the House reached a deal to bolster both the Committee on Foreign Investment in the U.S. and the U.S. export-control system, in an effort to block Chinese and other foreign transactions that could harm national security. The measure represents the first major change in a decade to the rules governing foreign investment reviews, and its impending passage follows a bruising battle among lawmakers and some of the country’s biggest companies. The provision could become law as soon as this month, Kate O’Keeffe and Siobhan Hughes report.
TOO SOON
Commerce Secretary Wilbur Ross said it is “too early” to say whether the Trump administration will move ahead with proposed tariffs of as much as 25% on imported vehicles and auto parts. The government is still analyzing whether it would impose tariffs on national-security grounds, he said. Auto makers, components suppliers and dealers testified on Thursday against the tariffs, arguing they would hurt the economy and put jobs at risk by raising consumer prices and sparking a trade war, Josh Zumbrun and Chester Dawson report. The European Union promised to retaliate if the U.S. goes ahead with them.
MADE IN THE U.S.A.
The Republican Party has become the party of blue-collar America. After the 1992 election, 15 of the 20 most manufacturing-intensive Congressional districts in America were represented by Democrats. Today, all 20 are held by Republicans. The shift of manufacturing from a Democratic stronghold to a Republican one is a major force remaking the two parties. It helps explain Donald Trump’s political success, the rise of Republican protectionism and the nation’s polarized politics, Bob Davis and Dante Chinni write.
What happened? Manufacturing moved out of big cities that were union strongholds and into blue-collar suburbs—areas where the Republican Party has been building strength. New England and the Northeast are out. The new manufacturing heartland runs through areas outside suburbs along interstate highways south from Michigan, Minnesota and Wisconsin through Ohio and into the Carolinas and the deep South.
BUDGET BUSTER
On Thursday we highlighted budget revisions released by the White House, which project larger deficits by an average $90 billion a year over the next decade compared to the February budget proposal. Step back to consider the extent of these revisions. In May 2017, the White House showed deficits over the period 2018 to 2027 would total $3.15 trillion. The Trump’s budget proposal this past February said deficits over the same period would more than double to $7.6 trillion. The latest estimates out this month show deficits now climb to nearly $8.5 trillion over this 10-year window. Keep in mind the White House in these forecasts gets to assume all of their tax and spending proposals become law, along with corresponding economic projections that assume 3% growth sustained for most of this period. - Nick Timiraos
On Thursday, we asked: Should the Trump administration go ahead with auto tariffs against the European Union? Here are some reader responses, sometimes lightly edited and condensed.
This is a no-brainer. When an industry asks for tariffs, policymakers should have a reasonably high bar for approval (is their dumping?; excessive subsidies? large deficits?). When the industry itself is telling policymakers “no thanks,” then stop there and go do something else! – Jared Bernstein, Center on Budget and Policy Priorities
We have been paying protectionist tariffs to European governments for decades to protect their businesses like autos, wine, cheese and I could go on. Frankly, this turn about is fair play. – Bob Kellogg
My personal concern is that he is losing trust of companies and leaders of other nations. Ultimately, you cannot lead, let alone negotiate well under those circumstances. – Marcy Weiner
The tariffs can be a tool to accomplish a more free trade. With the economy we are experiencing, could we not weather the potential job loss better than the EU? If the tariffs bring about more open trade for our country, would not the pain in the short run be worth it? - Randy & Lora Eisenberg
The United States should not introduce auto tariffs against the EU. Frankly what we should be doing is eliminating auto tariffs in both directions between us and the EU. That will result in a much more robust and profitable trade in autos especially one at the higher end of the market. Everybody wins if that happens. – Thomas McGovern, West Greenwich, R.I.
The mistake people make is [thinking] that these are permanent. This is a game of chicken and we are currently coming from a position of strength. Now is the time to use that strength to level the playing field. Our trading partners are mercantilist and we are the shoppers. That is unsustainable. – Matt Alexander
WHAT ELSE WE’RE READING
The U.S. economy is doing great. Don’t thank the White House. “The impact of President Trump on the macroeconomic performance of the US economy has been negligible so far. We measure neither an acceleration of growth nor increased job creation in the US economy relative to an appropriate benchmark,” University of Bonn’s Benjamin Born, University of Tübingen’s Gernot Müller, University of Bonn’s Moritz Schularick and Oxford’s Petr Sedláček write at VoxEU.
U.S. deaths from liver disease have increased sharply in recent years. The Washington Post picks up on a British Medical Journal study showing cirrhosis-related deaths increased by 65% from 1999 to 2016, and deaths from liver cancer doubled. “The researchers found that deaths for certain groups of people decreased between 1999 to 2008—but rose sharply starting in 2009. They speculated that the 2008 economic crisis and subsequent rise in unemployment may have been a factor,” the paper reports.
UP NEXT: WEEKEND
Treasury Secretary Steven Mnuchin joins financial leaders from the world’s 20 biggest economies in Buenos Aires this weekend. The Group of 20 meeting includes Canada, China, Germany and other nations in U.S. trade crosshairs. It’s the first such gathering since the U.S. hit China with $34 billion in tariffs, and China retaliated in kind.
from Real Time Economics https://ift.tt/2zXerQO
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