The Fed, Tariffs, and Employment

It was an eventful week. The Fed lowered short-term interest rates, as expected, and ended the unwinding of the balance sheet two months early, but Chair Powell disappointed stock market participants by describing the move as “a mid-cycle adjustment” rather than the start of a series of rate cuts. In his press conference, Powell repeatedly noted that the Fed’s move was taken to insure against the downside risks from trade policy uncertainty and slower global growth, to counter the impact these factors are already having on the economy, and to help boost inflation back toward the 2% goal. Powell did not make a judgement on whether tariffs were ill-advised – that’s not the Fed’s job. President Trump expressed disappointment on the size of the Fed’s move, but then further escalated the trade war the next day, imposing a 10% tariff on the remaining $300 billion in imports from China. Unlike previous tariffs, which applied mostly to manufacturing inputs and intermediate goods, this latest round hits finished goods – consumer goods, in particular.

The shorter version. Powell: “tariffs, tariffs, tariffs.” Trump: “hold my beer.”

Readers should be aware that tariffs are a misguided way to deal with bilateral trade deficits and misbehavior on the part of certain trading partners. Tariffs are a tax on U.S. consumers and businesses. Tariffs raise costs, invite retaliation, disrupt supply chains, and dampen business fixed investment. Much of this is now showing through in the economic data. The May 10th escalation in the trade war imposed a more significant drag on U.S. growth, but nowhere near enough to push us into a recession. However, as we’ve seen repeatedly this year, there are important psychological effects of the trade war on businesses and the financial markets.

Nonfarm payrolls rose by 164,000 in the initial estimate for July – a relatively strong pace, but there is a fair amount of statistical noise (the headline figure is reported accurate to ±110,000) and seasonal adjustment is often difficult (education and auto manufacturing posted gains, as unadjusted figures fell less than usual). Retail employment continued to decline. In the past, this has often coincided with weakness in consumer spending. However, courier jobs (including package delivery) continued to rise, consistent with the ongoing move to online shopping.