2018-06-06

MacroView: US Trade Policy and US Interest Rates Impact Global Markets

US may prefer separate trade deals with Canada and Mexico

Financial Times (ft.com) video above published Jun 4, 2018: US President Donald Trump says he may prefer separate trade deals with Canada and Mexico rather than the North America Free Trade Agreement.

Editor's note: various factors may be differentiating the U.S. from global markets affected  by the Trump trade policy and Federal Reserve rate hikes--“The economic effect of a global trade war may be worse on Europe, Japan and China than they are on the U.S., and global equity investors have to put their money somewhere”--Why tech stocks give ‘an insulating force field’ to this market | MarketWatch.com: "The trade uncertainty also has helped squelch the 10-year Treasury yield supporting equities [U.S. stocks], according to Colas. And his fourth factor is that we [U.S.] might weather whatever comes better than other countries do."

Raghuram Rajan Says The U.S. Federal Reserve Will Stick To Its Pace Of Rate Of Hikes

BloombergQuint video published Jun 4, 2018: Former Reserve Bank of India (RBI) Governor Raghuram Rajan* on emerging markets, U.S. Fed Reserve hikes and more: "unfortunately accidents can happen ... my worry is what you may think of as bargaining employees working out the art of the deal soon becomes hardened positions which become very difficult to back off and then you enter actual conflagration and that combined with the high degree of leverage and asset prices which are you know price to perfection that's the potent volatile combination."

*Dr. Rajan is currently the Katherine Dusak Miller Distinguished Service Professor of Finance at the University of Chicago Booth School of Business. He received his PhD from the MIT Sloan School of Management (1991).

He was the 23rd Governor of the Reserve Bank of India between September 2013 and September 2016. Between 2003 and 2006, Rajan was the Chief Economist and Director of Research at the International Monetary Fund. In 2015, during his tenure at the Indian Reserve Bank he also became Vice-Chairman of the Bank for International Settlements.

At the Federal Reserve annual Jackson Hole conference in 2005, Rajan warned about the growing risks in the financial system and proposed policies that would reduce such risks. Former U.S. Treasury Secretary Lawrence Summers called the warnings "misguided" and Rajan himself a "luddite". However, following the 2008 economic crisis, Rajan's views came to be seen as prescient and he was extensively interviewed for the Oscar-winning documentary Inside Job (2010).

Transcript (auto-generated)
00:00 [higher US interest rates] is my guess
00:03 unless something really untoward happens
00:05 in the global economy or in the US
00:08 economy which in the U.S. certainly
00:10 there's no sign that something is bad is
00:12 going to happen we will have a couple
00:15 more rate hikes after which the Fed will
00:18 look around and see well are we getting
00:20 close so round two point seven five [2.75] --
00:22 three [3.0] is approximately where it will
00:24 stop maybe one more next year and and
00:26 perhaps pause at that point say we're
00:28 closer to neutral than before and maybe
00:31 we have to see the consequences because
00:32 monetary policy has lags we've seen
00:36 around recently in emerging markets and
00:39 your successor Dr. Patel has come out
00:42 to say that you know the tapering pace
00:44 of the Fed is to blame for what receive
00:47 recently do you agree with the view well
00:49 I don't know that
00:53 these the liquidity in the financial
00:56 markets has disappeared as of now I
00:59 think Dr. Patel is raising a question
01:03 about going forward if there is a
01:04 substantial withdrawal of liquidity
01:06 whether in fact it causes markets to
01:09 tighten overly but my guess at this
01:11 point is the U.S. is focused on growth
01:15 of itse domestic economy and thinks that
01:18 inflation is pretty much where it wants
01:20 it to be and with labor markets below
01:23 what it thinks is consistent with full
01:25 employment that is at three point seven
01:28 this is a historic low [unemployment] that really
01:31 they're focused inwardly and unless
01:33 there's something big outside that
01:35 happens to knock them knock their sense
01:38 of what is going to happen in the US you
01:52 know you know in a world where countries
01:55 take full cognizance of the
01:56 international responsibilities one of
01:59 the things that I have been pressing for
02:01 is really the sense that the big central
02:04 banks should look at the consequences of
02:06 their actions also on other countries
02:08 that said I think emerging markets are
02:11in a much better situation today with a
02:14 few exceptions where you know finances
02:16 as well as politics or creating some
02:19 uncertainty amongst international
02:21 investors but I think broadly they're in
02:23 a much better situation than they were
02:25 say around
02:26 time of the people tantrum that is not
02:28 to say accidents cannot happen that's
02:30 agreed with a view of Jerome Powell who
02:32 said that emerging markets are in a good
02:35 position to navigate the shifts in US
02:37 policy when you talk about they are
02:39 exceptions which countries I would say
02:43 they're in a better position I think
02:45 there will be still stress for the
02:47 emerging markets and they will have to
02:48 cope with the rising dollar as well as
02:50 rising international interest rates as
02:52 well as the flow back of capital flows
02:55 which always happens at times like this
02:57 so there will be stresses of course if
03:00 you look around the world and you ask
03:01 which countries are already stressed you
03:03 would say Argentina is stressed and of
03:06 course Turkey is undergoing some stress
03:08 the central bank has raised interest
03:10 rates considerably as well as simplified
03:12 the interest rate structure I think in
03:15 countries looking forward because Italy
03:18 depending on what the government does
03:20 and how much it wants to break the
03:22 fiscal constraints that the [European] Union puts
03:26 on it and the euro area that's going to
03:29 be a place to watch Brazil where
03:31 elections are coming up and of course
03:34 Brazil has a medium-term fiscal problem
03:36 which needs to resolve by dealing
03:39 primarily with the pensions of public
03:42 sector employees that is going to face
03:44 the next presidents not going to happen
03:45 before there's going to be something the
03:47 next president will have to opine on
03:48 very quickly and that's something to
03:50 watch out for so there are countries
03:53 issues that they have to deal with as we
03:56 go forward
03:56 you didn't mention any of the emerging
03:58 markets in Asia well I think Asian
04:00 emerging markets are in a healthier
04:03 situation than in the past because of
04:06 fairly narrow current account deficits
04:10 very small fiscal deficits as well as
04:13 moderate inflation so there is more
04:16 confidence their currencies many of them
04:18 have moved to inflation targeting
04:19 regimes and there is a sense that you
04:22 know they're not gonna let inflation get
04:24 out of control so they are in a
04:26 different position again I would say
04:28 that Southen can get stressed at this
04:31 point I would say you know amongst the
04:34 big ones no clear and present danger you
04:37 talked about Italy and we saw the fall
04:39 out of Italy throughout the world
04:41 two months ago I met chief Christine
04:44 Lagarde did say that she was confident
04:46 the eurozone was on a sustainable path
04:48 of growth does Italy changed prospects
04:51 for eurozone well I think certainly the
04:54 advent of a populist government in Italy
04:57 we'll raise the questions that have been
04:59 raised and have been sort of have quiet
05:01 down which is what is the periphery
05:03 getting now in truth the periphery has
05:06 got a lot in terms of inheriting
05:09 credible monetary policy much lower
05:12 interest rates than they were used to
05:13 but at this point in a relative sense
05:16 when they look at the past they feel
05:20 that the exchange rate is stronger than
05:22 they would like and the benefits of low
05:25 interest rates are being subverted to
05:27 some extent by fears about the these
05:31 countries and the spreads are widening
05:34 so on the one hand we don't have as
05:36 flexible and exchange rate as we would
05:38 want on the other hand interest rates
05:40 are higher for us than we would like
05:42 relative to what they were in the past
05:45 and so our [Italian] firms are paying these higher
05:47 interest rates are not being able to
05:49 match competition from say Germany or
05:52 the Netherlands and so the core
05:54 periphery sort of divide is growing
05:57 again
05:57 I mean there is a dialogue to be had but
06:01 it is going to be a tough one
06:02 Italy is one challenge the other
06:04 challenge is trade US and after US and
06:08 China and of course US and its US steel
06:12 and aluminium tariffs is Asia most at
06:16 risk when it comes to concern about
06:18 protectionism well unfortunately
06:20 accidents can happen
06:22 and the world is not well prepared for
06:25 the entity at the center of the global
06:28 financial and monetary order and trade
06:31 order turning around and saying I don't
06:33 believe in all this I want to change
06:35 things now the system has been built by
06:38 the U.S. around the U.S.. and now the
06:40 U.S. actually doesn't believe in using
06:43 the multilateral system this is a very
06:46 big change and we're not prepared for it
06:48 now you would hope that good sense
06:51 prevails and some of what we see are
06:53 bargaining tactics rather than actual
06:57 threats which should be carried out the
06:59 problem of course is positions hardened
07:01 you make a threat somebody else makes
07:04 the counter threat soon you find you
07:06 cannot back off and then we get into
07:08 this is true of war it's true of trade
07:11 war and one of the big worries is that
07:13 threat something made left right and
07:15 center by so strong I would say largely
07:20 been strong men who want to be seen as
07:23 strong and the rule to back off is far
07:28 more limited
07:29 and every country with a democratic or
07:31 authoritarian essentially the
07:34 governments want to look strong so my
07:36 worry is what you may think of as
07:40 bargaining employees working out the art
07:43 of the deal soon becomes hardened
07:46 positions which become very difficult to
07:49 back off and then you enter actual
07:52 conflagration and that combined with the
07:55 high degree of leverage and asset prices
07:59 which are you know price to perfection
08:01 that's the potent volatile combination


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