Economics: Should The Fed Fix The Damage Done By Trump`s Trade War?

 (Drivebycuriosity) - Trump`s trade war against China shows the first casualties in the USA. Job growth slowed sharply and retail sales & industrial production dropped. Many pundits see the risk of a recession rising. It seems that the Fed is getting alarmed. Fed chairman Powell declared last week that the central bank is monitoring escalating trade tensions and would “act as appropriate” to sustain domestic economic expansion. His comment started a little rally on the stock market.  The market expects now that the Fed will cut her interest rates at least 2 times this year to fix the damage done by Trump`s trade war.

The US economy was doing well before Trump hiked his tariffs on Chinese goods to 20%. Without the trade war there wouldn`t be the need for interest rate cuts. But Trump`s aggressive tariff hikes - and his thread that he could go even further -  spooked the stock market and irritated investors & consumers. Should the Fed compensate the damage done by the president?

I think this would be a mistake. Trump would get the impression that his reckless behavior comes without costs. If he can do what he wants and the Fed always clears the damage then he may get inspired to start more and worse trade wars. If the Fed would act as the nurse of the president they would lose their credibility. There is the also the risk that lower interest rates - in combination with higher import prices - will restart inflation. The price of oil jumped already this Friday fanned by the interest cut speculation. If the inflation comes back - kindled by to cheap money and climbing import prices - then the Fed would need to respond by hiking her interest rates again - which could cause an even worse recession.