US President Donald Trump applauds during his first state of the union address on Capitol Hill in Washington, on January 30 2018. Picture: REUTERS
US President Donald Trump applauds during his first state of the union address on Capitol Hill in Washington, on January 30 2018. Picture: REUTERS

Just when it looked like the global economy was running on all cylinders, President Donald Trump injected a degree of risk to the otherwise favorable outlook.

The U.S. president announced on Thursday plans to impose 25 percent tariffs on imported steel and 10 percent tariffs on foreign aluminum, with more details to be unveiled next week. American equities cratered for a third day as fears of a trade war spread and expectations for U.S. economic growth weakened a bit.

The move to protect American metals producers threatens to raise prices for consumers and businesses that buy goods made with the raw materials. That will have implications for a U.S. central bank that’s debating how fast to raise interest rates this year.

“If tariffs go up, it will, at the margin, tend to put more upward pressure on prices, and those upward pressure on prices will have to be considered by the monetary authority,” New York Fed President William Dudley said in a speech in Brazil on Thursday.

The extent of any economic damage will depend on the fine-print of Trump’s new policies and the severity of countries’ retaliation. Some economists worried the move might presage a shift toward an era of more economy-inhibiting protectionism just when it looked like the growth headwinds were fading.

“It is possible that a more aggressive shift in policy is under way that could undermine the pro-growth tilt of fiscal policy, harming the U.S. and global economic expansions,” JPMorgan Chase & Co. analysts led by David Hensley wrote in a research note after Trump’s announcement.

Powell’s Debut

It’s Jerome Powell’s Federal Reserve now. Almost four weeks since becoming the 16th person to run the U.S. central bank, the former investment banker made his congressional debut as chairman in what was the main event for the global economy this week:

The new chief stuck broadly to the Fed’s recent message, signaling it will keep raising interest rates in a gradual fashion. He did though hint policy makers could potentially act faster than the three hikes they now anticipate.

As Craig Torres reported beforehand, that reflects how a $1.5 trillion tax package is adding stimulus to the economy at a time of already low unemployment and solid growth. 

The trick Powell will be keen to pull off is delivering a rare soft landing of the economy even with full employment.

Achieving that may require him to run inflation above the 2 percent rate the Fed targets. Much will though depend on where the Fed’s so-called neutral rate lies, the subject of fierce debate.

Click here for other things we learned from Powell.

Weak Inflation

Elsewhere in the global economy, the European Central Bank is still debating how to exit its own stimulus program.

Bundesbank Governor Jens Weidmann told Bloomberg this week that quantitative easing could end this year.

A third month of slowing inflation in the euro-area may ward against such haste, however, and ECB President Mario Draghi said he’s not yet ready to pare back support.

Also worried about weak inflation are Swedish central bankers, where price pressures are unexpectedly slowing despite massive stimulus. “If you look at the past few months, inflation pressure has been a bit lower than we had counted on,” Riksbank First Deputy Governor Kerstin af Jochnick told Bloomberg.

Still, a reported spike in toilet paper prices is making consumers skittish on inflation in Taiwan.

Forward Guidance

Central bankers aren’t short of outside advice.

Billionaire investor Ray Dalio said they could face a challenge after a "Goldilocks"period, while International Monetary Fund Managing Director Christine Lagarde said normalizing policy may spark volatility in markets.

Former U.S. Treasury Secretary Lawrence Summers warned the next U.S. recession may be longer than the last one.

And Bloomberg Gadfly suggested central banks may be wrong on wages.

Musical Chairs

There’s still no sign of a replacement for Zhou Xiaochuan as governor of the People’s Bank of China, although the country’s leaders did approve nominees for top government jobs.

Here’s a guide to the possible timetable for an announcement. In the meantime, Chinese officials are taking steps to rein in the finance industry and the economy is showing new signs of cooling. A momentous fortnight begins next week when leaders set policies for the year and detail plans to curb financial risk, air pollution, and excess industrial capacity.

Taiwan on Monday got its first new central bank governor in 20 years, and as South Korea’s central bank Governor Lee Ju-yeol’s term draws to a close, the list of potential candidates to replace him is narrowing.

At the ECB, Draghi doesn’t sound too happy about how appointments are made to his executive board.

- Bloomberg

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