Trump banks on Federal Reserve and China to fuel 2020 economy

Trump banks on Federal Reserve and China to fuel 2020 economy

President TrumpDonald John TrumpTrump opens new line of impeachment attack for Democrats Bloomberg to spend 0M on anti-Trump ads in battleground states New witness claims first-hand account of Trump's push for Ukraine probes MORE is counting on the Federal Reserve and renewed trade talks with China to help power the U.S. through an economic obstacle course that could impede his path to reelection.

Trump’s campaign for a second term hinges in large part on the strength of the U.S. economy and his ability to claim credit for it.

ADVERTISEMENT

That mission became more challenging on Friday when the Commerce Department issued new numbers showing gross domestic product (GDP) slowed from a 3.1 percent pace in the first quarter to 2.1 percent the following three months.

Trump tweeted a tepid acknowledgement of the GDP report, but he pinned the blame on the Fed’s 2018 rate hikes.

“Not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck,” Trump tweeted, rehashing his well worn snipe at the central bank.

While a souring global economic forecast and mounting damage from Trump's trade wars have taken their toll on American businesses, there are still reasons for economic optimism heading into 2020: Both the labor market and consumer spending are registering historically strong numbers, leading to robust hiring and low unemployment.

But with global risks rising and U.S. businesses beginning to brace for potential economic pitfalls, China and the Fed could have stark implications for the economy heading into a crucial election year.

ADVERTISEMENT

The Fed is slated to hold its next monthly policy meeting on Tuesday and Wednesday, and policymakers are almost certain to cut interest rates. Around that same time, top U.S. and Chinese officials will meet in Shanghai to revive talks aimed at ending the yearlong trade war between the world’s two largest economies.

Beth Ann Bovino, chief economist at S&P Global, said a Fed rate cut would be boon for U.S. consumers. But lowering borrowing costs, she said, might not be enough to nullify trade-related anxiety and other foreign headwinds.

“When we look at some of the business and investment readings, it does look like they're a little bit more cautious and reluctant to open up their pocketbooks,” Bovino said. “Yes, sure, the Fed is filling up the punch bowl, but how many people are drinking?”

Trump pledged throughout his 2016 presidential campaign that the U.S. economy under his watch would grow 3 to 4 percent each year. Economists across the political spectrum raised doubts that the economy could maintain that rate of expansion, and they were vindicated Friday when revised government figures showed GDP expanded 2.5 percent in 2018.

Fuel from the 2017 tax cuts and federal spending increases helped last year’s growth, but the $1.5 trillion GOP tax cut has not led to the level of business investment predicted by many of Trump’s allies.

Fed Chairman Jerome Powell and his colleagues have expressed concern with fading business spending and the potential deeper losses triggered by trouble in Europe and China.

“When businesses become uncertain about the future and about future demand,” Powell told lawmakers on July 10, “they may decide to wait before they build something or buy something, and they may just hold off.”

“There's no perfect way to identify these things,” Powell added. “But we do connect that to trade policy uncertainty, and also uncertainty about global growth and weak manufacturing around the world.”

A Fed rate cut this week may provide a short-term boost to wary American businesses, but it will be up to Trump to sooth the trade tensions sparking much of their anxiety.

While Washington and Beijing have agreed to hold off on further tariffs while trade talks resume, it’s unclear whether both nations will reach a deal.

Larry KudlowLawrence (Larry) Alan KudlowMORE, the president’s top economic adviser, set low expectations for the upcoming trade talks, saying the goal was simply to “reset the stage” after negotiations collapsed in May.

“I wouldn’t expect any grand deal,” Kudlow told CNBC’s “Squawk on the Street” on Friday.

Business advocates made clear that they want to see results, and their patience with the turmoil is running thin.

“Weak business investment is a significant drag on economic growth and this needs to be turned around quickly,” said Karen Kerrigan, president and CEO of the Small Business and Entrepreneurship Council, which advocates for business-friendly policies.

“Clearly the effects of trade policy and tariffs are taking their toll and undermining growth.”