It has always been our view that financial markets are much happier when the Federal Reserve is at the economy’s helm and Washington takes a back seat in the boat. This is because the Fed tends to be much more transparent, it operates by a loose set of rational economic rules (admittedly some of which may or may not actually hold, but at least we know the thought process), there are only so many tools at its disposal, and it normally tends to give as much forewarning as possible with regard to actions in order not to spook investors. When politicians take the helm, the policy decisions are often being made for political reasons rather than necessarily economical rational ones. Significant uncertainty also arises as to whether or not any particular measure will in fact become legislation, what that legislation will or won’t contain, and lastly what impact it might then have on the real economy, financial markets, and foreign trading partners. While the recently enacted tax cuts proved to be a major near-term upside surprise for the markets, the President’s recent announcement that he would be slapping import tariffs of 25% on steel and 10% on aluminium has not proved to be so popular. In this week’s Economics Weekly, we look at these tariffs within the wider context of where the economy is and what might be some of the resulting implications.
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Richard de Chazal, CFA is a London-based macroeconomist covering the U.S. economy and financial markets.