March 20, 2019

The Big Question for Markets: Is There a Kudlow or Powell ‘Put’?

The market sell-off abruptly halted on Wednesday after Mr. Kudlow told reporters in the White House driveway, in effect, not to sweat the incipient trade war. He said it was possible the tariffs would never come to pass and that the president was “ultimately a free trader” who “wants to solve this with the least amount of pain.”

The Standard Poor’s 500 index ended that day up 1.2 percent.

So the question is whether Mr. Kudlow — not so much the individual, but the trade war-averse faction within the administration of which he is perhaps the most visible member — and others are going to be in position to prevent the administration from doing anything economically destructive on trade.

The pattern on trade policy through the first 14 months of the Trump administration has been to pair blustery talk — about pulling out of the North American Free Trade Agreement, for example — with more modest policy actions and negotiations that may avert real economic damage.

But the question is whether that dynamic is changing, with the departure of more internationalist voices within the administration like Mr. Kudlow’s predecessor, Gary Cohn, and the former secretary of state Rex Tillerson.

If Mr. Kudlow is able to offer only soothing words in the White House driveway — and those words aren’t matched by restraint in policymaking — the Kudlow Put will turn out to be fairly worthless. A warning sign about that possibility came Thursday night, when the administration threatened tariffs on an additional $100 billion in Chinese imports, in retaliation to China’s retaliation.

This is the kind of escalation that would, if it became policy rather than mere threat, be quite ominous for financial markets. Again on Friday, Mr. Kudlow offered calming messages, saying “there are all kinds of back-channel discussions going on.” But given the continued escalation after his earlier attempts at calm, the Kudlow Put didn’t quite work, and the market fell 2 percent that day.

Then there is Mr. Powell, who is in his second month as Federal Reserve chairman. He delivered a speech Friday that threw into doubt whether the Powell Put exists — at least with respect to potential economic disruption from a trade war.

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