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Is China or the Federal Reserve the problem?

01 November 2019

In response to the Federal Reserve (Fed) meeting earlier this week, President Trump tweeted the following message:

"People are VERY disappointed in Jay Powell and the Federal Reserve. The Fed has called it wrong from the beginning, too fast, too slow. They even tightened in the beginning. Others are running circles around them and laughing all the way to the bank. Dollar & Rates are hurting our manufacturers. We should have lower interest rates than Germany, Japan and all others. We are now, by far, the biggest and strongest Country, but the Fed puts us at a competitive disadvantage. China is not our problem, the Federal Reserve is! We will win anyway."

The Fed cut rates for the third time this year in light of continued low inflation and a bleak environment for manufacturing. However, the consumer has held up thus far and unemployment remains historically low. Problems in manufacturing have become a global concern; in recent months, we have seen the sector decline, exacerbated by the uncertainty of the ongoing trade disputes. European interest rates have moved further into negative territory, but even rates this negative may not affect the industry dynamics. Therefore, blaming US manufacturing malaise solely on the Fed's monetary policy and strong dollar is arguably unjust. After all, on a trade-weighted basis, it is about the same level it was at the start of 2017 when Trump came into office.

The more likely cause of the slowdown is a lack of business investment, partially as a result of the ongoing trade war. The tariffs instigated by President Trump have resulted in a slowdown in global trade and uncertainty about the path of trade talks makes it difficult for businesses to make investment decisions. While Trump continues to tweet about progress on a trade deal, this faced a snag on Thursday when China expressed scepticism over the possibility of a comprehensive agreement. China has raised concerns over the President's impulsive nature and the risk that he may back out of the already limited deal that is on the table at the moment.

Rather than blaming the Fed or China for the problems in the manufacturing sector, President Trump could benefit from reflecting on the effects of his actions. His insistence on fighting a trade war may be the root cause of the issues occurring in the manufacturing sector.

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