December 14, 2018

Economy Hits a High Note, and Trump Takes a Bow

For policymakers at the Federal Reserve, the tax cuts and spending increases could pose a nearer-term challenge. The Fed has been trying to strike a delicate balance, raising interest rates gradually in an effort to keep inflation in check without snuffing out the recovery. If the second quarter’s growth rate continues, it could risk accelerating inflation and prompt the Fed to raise rates more quickly. That, in turn, could cause a recession.

There is little to suggest that will happen, however. Inflation slowed slightly in the second quarter, and Friday’s report is unlikely to persuade officials to deviate from their gradual and carefully devised march to higher interest rates. The central bank is on track to raise rates twice more this year, after two increases in the first half of the year.

The more immediate risk may be the possibility of a trade war. Mr. Trump has placed tariffs on billions of dollars of imports from China, the European Union and other countries. Trading partners have responded by imposing retaliatory tariffs, and both sides have threatened more.

Tensions with Europe appeared to ease this week when Mr. Trump and Jean-Claude Juncker, the president of the European Commission, agreed to work toward a trade deal. But the durability of that truce is unclear, and relations with China remain fraught.

Trade friction has yet to dampen business leaders’ confidence, however, let alone caused them to change their behavior. In conference calls in recent weeks, executives said they were watching tariff announcements closely, and companies including General Electric, Whirlpool and United Technologies have said tariffs are raising costs or cutting into profits. Few, however, said they were slowing hiring or canceling projects.

“You’re hearing some notes of caution, but nothing specific regarding pullbacks,” said Bill Warlick, an analyst for Fitch, the ratings agency. Big companies, he said, make big investment decisions years in advance and will be slow to change course.

Article source: https://www.nytimes.com/2018/07/27/business/economy/economy-gdp.html?partner=rss&emc=rss

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