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Trump Can’t Ignore Powell’s ‘As Long as Possible’ Remarks

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Oct. 7 2019, Published 1:20 p.m. ET

Fed Chair Jerome Powell has already raised doubts about President Donald Trump’s trade war and its effect on the US economy. On October 4, at a Fed Listen event, referring to the Fed’s responsibility toward the economy, Powell said, “Our job is to keep it there as long as possible.” These remarks could hint at concern on the Fed’s part.

Powell also said, “While we believe our strategy and tools have been and remain effective, the U.S. economy, like other advanced economies around the world, is facing some longer-term challenges.”

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Powell also said, “Overall it is—as I like to say—in a good place.” He expressed confidence in the current state of the economy. On October 4, the Bureau of Labor Statistics released the unemployment rate for September. The unemployment rate was at 3.5%, at a 50-year low. Non-farm employment numbers increased by 136,000. In August, this number increased by 130,000.

But leading indicators such as the manufacturing PMI (purchasing managers’ index) indicate trouble for the economy ahead, as they could mean reduced job growth in the future. Cyclical stocks such as Boeing (BA) and General Motors (GM) could react to any slowdown in job growth. Any slowdown could hit consumer confidence and dent airliners’ revenue. GM’s car sales also depend on the economic growth rate.

Long-term challenges

The various long-term challenges faced by the US economy are the rising aging population, slowing participation in the labor market, and falling productivity. Former Fed chairs Janet Yellen and Alan Greenspan have already outlined these long-term challenges. Last month, Greenspan said to CNBC, “Overall, the economy seems to be sagging.” Yellen also said, “The economy seems less dynamic than it used to be.”

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Trump’s new immigration rule

Last week, President Donald Trump decided to block immigrants who don’t have health insurance from entering the US. According to the proclamation, “Data show that lawful immigrants are about three times more likely than United States citizens to lack health insurance.” In this decade, uncompensated care costs have soared more than $35 billion every year. Uncompensated care costs are “the overall measure of unreimbursed services that hospitals give their patients.”

On average, each hospital in the US could bear $7 million in costs, which could affect the entire healthcare system. Moreover, hospitals might pass those losses to other patients through higher premiums and charges. However, in 2018, 17.4% of the total US labor force was foreign-born. Bringing this legislation forward at a time when the labor growth rate is expected to be at 0.5% could hurt the economy.

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A stronger dollar

Trump blamed the Fed for the stronger US dollar. Since June 2018, the US dollar has gained 5.2%. In the same month, Trump escalated the trade war. There are many reasons for the rise in the US dollar, and the US-China trade war is one of them. Trump’s tariffs have affected businesses across Asia and Europe. They’re primarily responsible for Germany’s and Singapore’s economic contractions.

To fight the slowdown, central banks across the globe are easing their monetary policies. India is the second-fastest-growing economy in the world. It slashed interest rates for the fifth time this year. The European Central Bank did the same thing last month. The easing of monetary policy across the globe is boosting the US dollar.

Moreover, it’s also pressuring the Fed to reduce interest rates to calm the dollar’s rise. Economist Robert Shiller disagreed when the Fed’s decision to reduce interest rates for the first time in July. According to the Noble Laureate, the Fed should have increased interest rates at least once before entering the easing cycle. 

Not only monetary policy but also equity markets across the globe are behind the rise in the US dollar. The sluggish return in the foreign equity market might discourage investors from relocating money from the US to other markets—a positive development for a stronger US dollar.

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