By John McDonald
With recent economic news pointing the country toward higher recession risks, some analysts are skeptical that the president and the Fed will be able to boost the national economy enough to completely avoid a downturn.
With only 75,000 new jobs added in May (compared to an average 223,000 per month in 2018) and controversial trade policies toward China and Mexico, the national economy could be feeling the effects of a relatively tepid first half of 2019.
Federal Reserve chair Jerome Powell addressed the matter head-on in early June, announcing that the Fed would likely not raise interest rates again this year and, furthermore, implied it might actually lower them.
“We are closely monitoring the implications of [trade policy] for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective,” Powell said.
The chair’s commentary alone seemed to have a positive effect on Wall Street, with a rally following closely on the heels of his remarks. One week later, the stock market surged toward record highs, pulling investors out of government bonds and pushing yields up in response.
However, longstanding Fed practices now come with a long-standing track record as well, and not all of the metrics look good for the indefinite delay of a recession.
According to Forbes columnist and economics professor Teresa Ghilarducci, lowered interest rates and their companion, expanded credit, will boost an economy “in about 10-13 months.” Fiscal policies like tax cuts or government spending tend to create “temporary stimulus after about 6-8 months,” she added.
If these metrics hold true, then the Fed could help the president ward of a recession until after the election, but ultimately the overall economy, including the national job market, costs of living, and global position will have to solidify in order to ward said recession off indefinitely.
The deciding factor, then, will be whether current policies remain in place and, further, whether they are truly long-term, positive factors for the U.S. economy.
Other analysts warn investors should not take Powell’s remarks as a commitment to rate cuts, rate hikes, or a suspension of either. In fact, many critics of national economic policy warn that the ongoing role of the Federal Reserve in stabilizing the U.S. economy could create an environment in which politicians on both sides of the aisle feel free to indulge in problematic policies with relative impunity, at least in the short term.
Of course, Powell’s openly stated willingness, such as it was, to potentially lower interest rates has been a boon for precious metals investors already.
The Wall Street Journal noted in the wake of his statement, “Gold is on its longest winning streak in almost a year-and-a-half, the latest signal that investors are preparing for the Federal Reserve to lower interest rates amid signs of a slowdown in economic growth.”
Analysts Joe Wallace and Amrith Ramkumar added if the Fed cuts rates, it will “lift the allure of gold” while also making the metal cheaper for foreign investors, possibly driving up values even farther.