Fed Faces Challenge Of Engineering A Soft Landing

Powell Should Pull Up on the Stick and Put Rate Hikes on Hold through the Summer

The Fed faces the tough challenge of engineering a soft landing for the economy.

The recent strong jobs report notwithstanding, manufacturing activity and bank business lending are slowing. Managing the situation is made terribly more difficult by the secular decline of Europe and China's recent woes, slowing economic activity abroad, the government shutdown and trade war with China, and structural changes that alter historical relationships between monetary policy and interest rates and employment and inflation.

The nearly 3% growth accomplished in 2018 was no accident of nature. The 2018 tax cuts and February 2018 budget deal that lifted federal appropriations caps through the current fiscal year boosted consumer and government spending.

Lower corporate taxes permitted businesses to invest in labor-saving robots, artificial intelligence, and workforce training, and deregulation slashed private-sector compliance costs. All boosted labor productivity growth.

More demand, more supply, and the economy zoomed ahead.

In 2019, consumers are getting an additional lift from lower gas prices but the boost from personal tax cuts and higher government spending have largely run their course. And the slowdown in business bank borrowing likely indicates investments in machines, software, and skills are slowing too.

Brexit and Angela Merkel's imminent departure, the yellow-vest riots in France, and a populist government in Italy were nominally instigated by unchecked immigration, higher taxes on gasoline, and a left-right coalition agreement to spend more than the European Union's national debt limits permit.

In reality, the onerous regulations imposed by the EU bureaucracy and mercantilist policies in Germany that impose perennial trade deficits and austerity elsewhere are pulling the EU apart.

The bottom line is Europe can't grow - and it's America's most important export market.

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Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster ...

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Gary Anderson 10 months ago Contributor's comment

Great article. The Chinese economic miracle could have benefited the USA more, but apparently the US doesn't want good Chinese equipment that is cheaper and superior being sold into the US market. But Trump wants China to open up. What a joke.