Did the Fed accidentally help Trump win in 2016?

Did the Federal Reserve inadvertently help President Trump win in 2016?

There’s a huge array of factors that go into determining why Americans pick the presidents they do. But research suggests the economy may be as much as half the mix. And it generally looks like the trend in the year running up to the election is overwhelmingly important: an improving economy favors the incumbent party; a falling one favors the opposition.

Well, it turns out the central bank’s decision to finally start raising interest rates in late 2015 likely hit American sectors like energy, agriculture, and manufacturing hard. The result was a “mini-recession,” as Neil Irwin termed it in The New York Times. “Severe in certain places, but concentrated enough that it did not throw the overall United States economy into contraction.”

That mini-recession dragged down key industries in rural areas that ultimately swung for Trump, just in time the for the 2016 election.

As Irwin tells it, things played out like this: The Fed finally decided in December 2015 to hike interest rates, with a plan to keep raising them gradually. Interest rates had been at rock bottom ever since the 2008 crash, and the idea was that the national economy was finally strong enough for the central bank to begin normalizing. But other central banks, like those in Japan and the European Union, were lowering interest rates, leading to a big run-up in the value of the U.S. dollar versus other currencies.

This caused myriad problems around the world. It made debts that emerging markets had taken out in U.S. dollars harder to pay back. (Turkey, for example, is still struggling with this.) China was trying to devalue its own currency to control an economic slowdown, but the Fed’s decision caused them to overshoot the mark. The Chinese government didn’t get the resulting capital flight under control until 2017. Since other emerging markets often supply China with physical goods to supply its massive growth, the country’s slowdown hit their economies too. Oil prices had already fallen off a cliff in 2014, which just added to emerging markets’ woes.

All these factors crushed specific U.S. industries. Energy was wrecked by the oil price fall; agriculture and manufacturing — export reliant industries — suddenly lost a lot of international buyers, not to mention demand supplied by one another. According to the Times, agricultural machinery production dropped 38 percent from 2014 to 2016; petroleum and natural gas infrastructure fell 60 percent. Caterpillar alone saw revenue fall 30 percent.

By September 2015, all seven regional manufacturing indexes had already been in decline for months and had just entered negative territory, indicating a contraction. News headlines at the end of the year openly wondered if the whole economy was headed for recession in 2016; indeed, overall U.S. economic growth briefly ground to a near-total halt in that period. National spending on structures and investment plunged from mid-2014 to the start of 2016.

“Overall economic growth slowed but remained in positive territory,” …read more

Source:: The Week – Politics


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