A Veto-Proof Tariff Revolt Gains Momentum; Trump Gets His Way With the Fed
Author: Greg Valliere
June 5, 2019
THE REBELLION GROWS: Republicans don’t like to challenge Donald Trump — it doesn’t play well with his rock-solid base — but it appears that a GOP revolt against Trump’s Mexican tariffs is gaining momentum in Congress. At the least, vote counters on Capitol Hill anticipate passage of a resolution rejecting the tariffs — and in the past 24 hours they have concluded that a Trump veto could be over-ridden.
FIRST THERE WILL BE A CRUCIAL SUMMIT between U.S. and Mexican officials later today, with a goal of defining just what, exactly, the U.S. is seeking. The Mexicans have sounded conciliatory, and it’s possible that the new tariffs might be delayed before the June 10 deadline, giving both sides time to negotiate.
TRUMP DOESN’T APPRECIATE THE EXTENT OF REPUBLICAN OPPOSITION to these tariffs, a GOP Hill staffer told us last night. Our source notes that highly respected GOP Senators like Rob Portman and Mitt Romney have the upper hand; pro-business Republicans overwhelmingly oppose the tariffs, and they have told the White House that Trump lacks the legal authority to act.
TRUMP IS UNWILLING TO BACK DOWN for two reasons: First, his base wants a crackdown on illegal immigration; Second, in a perverse twist, the worse the tariff wars look — threatening to further weaken U.S. and global growth — the more likely the Federal Reserve will do precisely what Trump wants: lower the federal funds rate. He knows that a compliant Fed is the key to his re-election.
JEROME POWELL MUST HAVE PLEASED TRUMP yesterday by indicating that the Fed will cut rates if the trade crisis persists, so what incentive does Trump have to quickly end the trade wars? We don’t think there’s enough support within the Fed for a cut at the June 18-19 FOMC meeting — the central bankers probably will wait to see what happens at the G-20 summit late this month.
BUT THE IRONY IS RICH: Trump demanded rate cuts, and now the issue seems to be when and by how much, and all he had to do was intensify the trade wars, which he’s happy to do. Trump can win modest tariff deals by fall, demanding strict compliance, coupled with the threat of re-igniting these disputes if there isn’t compliance — while the federal funds rate probably falls by 50 basis points by year-end.
IT’S ALL ABOUT 2020: By the autumn, it’s possible that Mexico and China will be fearful of much weaker economic growth, and they may have to capitulate, which would be a huge plus for Trump heading into 2020. And if the U.S. markets are happy to see astonishingly low interest rates jump-starting the economy early next year, Trump could run on a 3% unemployment rate.
WHILE THIS PROBABLY IS TRUMP’S GAME PLAN, there are several potential pitfalls — a recession risk later this year, plenty of geopolitical hot-spots, and a Republican party leadership that finally is willing to challenge him. It’s a high-wire act for this unpredictable president, who has to worry that confidence in his tactics is waning on Capitol Hill and elsewhere.
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