Trump tariffs: Central banks can’t afford to wait and watch forever
Summary
- They’ll need to act soon. US President Donald Trump, meanwhile, ought to watch a clip from the Hollywood film ‘Ferris Bueller’s Day Off’ that features a teacher talking about America’s 1930 Smoot-Hawley tariffs.
It’s discomforting to see the men and women who have saved the global economy numerous times be so flummoxed by the ongoing trade war. Even if they were less than fully convinced about what would ultimately be required, they tend to act decisively. Officials are feeling their way through the tariff drama, just like the rest of us.
This type of caution does, though, come with term limits.
The Bank of Korea reached the defensible conclusion last Thursday that it’s better to hold fire while talks over the huge levies Donald Trump imposed on trading partners play out. As a major exporter and firm US ally, South Korea had reason to hedge when it kept interest rates unchanged.
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It’s impossible to know what the White House will accept—or even if it will stand by any accords reached during the 90-day period when the most punitive duties are suspended. “Highly unpredictable," was how the Bank of Canada chief put it charitably a few hours earlier. US Federal Reserve Chair Jerome Powell, often in Trump’s bad books, sees potential risks to both price stability and employment. At some point, he may have to lean more toward one of those two mandates.
Powell made light of the troubling times last Wednesday by referring to a line from the 1986 movie Ferris Bueller’s Day Off: Life moves pretty fast. A day later, Trump mused about firing Powell.
The collective sense of ‘we don’t know’ will give way to either hiking or easing. In Asia, the bias appears to favour the latter. Bank of Japan (BoJ) Governor Kazuo Ueda demurs on a direct answer when questioned whether the rate increases the BoJ has embarked on can continue. But there is a distinctly dovish tone to his hesitancy. Of course, the bank is ready to lift rates again—from a very low level—if the reasonably positive outlook stays intact. “We will make an appropriate decision depending on the changing situation," he told the Sankei newspaper.
If the tariffs do go into effect, Japanese growth is expected to take a decent hit; exports were already slowing in March. The more likely scenario is one similar to that flagged by Nomura Holdings, which pushed back forecasts for the next BoJ increase from July to early next year. The firm now sees just one move through March 2027, down from two.
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There’s little doubt which way the Bank of Korea will jump. The bank’s statement showed an undeniable preference for resuming the rate reductions it began last year. All six members of the policy committee indicated they were open to a cut in the coming three months; one opted for a slice on Monday.
There’s a chance South Korea’s GDP shrank in the first quarter, according to Governor Rhee Chang-yong. Inflation is under control. One local wrinkle: Confidence among businesses and consumers took a hit from the short-lived imposition of martial law in December, a mistake for which the-then president was impeached and removed from office. Rhee, for all intents and purposes, pre-announced a cut in May.
The Reserve Bank of Australia (RBA) is lying low ahead of an election on 3 May. When the RBA cut rates in February, Governor Michele Bullock went out of her way to discourage speculation there would be more. Trump has both changed the calculus and amplified the risks around going it slow, and more economists predict a reduction in May, perhaps even as much as half a percentage point. The European Central Bank is projected to relax borrowing costs multiple times before year-end.
Yes, ‘Liberation Day’ was a shock to the global economy. Outside the US, bets are that it will harm growth and might constrain inflation. All those Chinese goods that may be prevented from finding buyers in America will have to go somewhere else.
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Perhaps the scene most relevant today in Ferris Bueller’s Day Off, the John Hughes film whose hero—played by Matthew Broderick—is a truant, comes in economics class. The teacher tells the languid students that the 1930 Smoot-Hawley Act, which erected a protectionist wall around the US, was a deeply flawed piece of legislation. He struggles to get a reaction from them. “Anyone? Anyone," the instructor asks in an effort to get attention. The Trump administration could learn something from watching this.
As an aside, the film’s teacher is played by Ben Stein, whose father was a member of Richard Nixon’s Council of Economic Advisers when the former president quit the Bretton Woods system of fixed exchange rates, a ruction for the ages.
We’ll be counting the cost of Trump’s salvo against the trading system for some time. Monetary policy in Asia seems headed in one direction, sooner rather than later. ©Bloomberg
The author is a Bloomberg Opinion columnist covering Asian economies.
