Trump Says the Fed Prevented 4% Growth. That Isn’t True.

Real-World Version

So how did the Fed’s actual policies affect growth?

Relative to the economy’s structural growth path — the one driven by labor force expansion and productivity — the Fed’s rate-setting may have shaved about 0.1 percentage point from growth in 2019, according to an estimate from Julia Coronado, a founder of MacroPolicy Perspectives. Slower capital expenditures and trade probably shaved another 0.1 percentage point from growth. But those effects were offset by the aftereffect of ramped-up government spending and tax cuts, which she estimates probably lifted growth by about 0.4 percentage point.

But even here, there are uncertainties.

While it is clear that business investment fell sharply last year and manufacturing sagged, weighing down growth, it is hard to tell how much of that was a lagged response to higher interest rates and how much was a response to the trade war.

Anecdotally, businesses primarily blamed slower global growth and uncertainty stemming from the tariffs for that slump.

But interest rates probably had at least some economic impact. After the central bank cut them three times between July and December 2019, the wavering housing market perked back up, for instance.

“The slowdown in capital expenditures came along when the trade war escalated,” Torsten Slok, an economist at Deutsche Bank, said in an interview. “One cautious estimate is that the trade war played a bigger role,” he said, but “it’s just really difficult to wiggle out which was the cause.”

The upshot: The Fed matters around the edges, but, in the longer run, it is unlikely that the economy can achieve the 4 percent growth Mr. Trump has promised.

Tax cuts and higher government spending have helped to nudge growth temporarily above its potential — it came in at 2.8 percent in 2017 and 2.5 percent in 2018, decently above the roughly 2 percent sustainable growth rate.

Article source: https://www.nytimes.com/2020/01/22/business/economy/trump-fed-growth.html?emc=rss&partner=rss