Donald Trump’s top economic adviser, Larry Kudlow, called trade tensions shadowing the G-7 conference beginning Friday “a family quarrel” and said Trump will meet one-on-one with Canadian Prime Minister Justin Trudeau and French President Emmanuel Macron at the summit.
Trump is expected to attend the Group of Seven summit on Friday and Saturday with the leaders of the world’s largest economies before flying to Singapore for a historic meeting with North Korean leader Kim Jong Un on June 12.
Finance ministers from the six other nations participating in the summit issued a rare public rebuke during a preliminary meeting last week, saying they would retaliate against Trump’s decision to impose duties on steel and aluminum imports from the European Union, Canada, and Mexico.
The criticism has been particularly acute from the summit’s host, Canadian Prime Minister Justin Trudeau, who said Sunday the tariffs were “insulting” to the longstanding alliance between the U.S. and Canada.
“The idea that we are somehow a national security threat to the United States is, quite frankly, insulting and unacceptable,” Trudeau said in an interview with NBC News.
Kudlow rejected criticism of Trump and declined to describe the dispute as a “trade war.”
“Don’t blame Trump. Blame the nations that have broken away from” the world trade order, Kudlow told reporters at a White House briefing. He called Trump a “trade reformer.”
Further complicating the U.S. relationship with Canada is the ongoing effort to renegotiate the North American Free Trade Agreement, with both leaders saying they are willing to walk away from the pact if talks fail to produce a revised agreement to their liking. Trump has recently said he’d be interested in negotiating separate bilateral trade deals with Mexico and Canada instead of updating Nafta.
Some White House officials are discussing additional economic penalties in response to the $13 billion in retaliatory tariffs Trudeau has promised, the Washington Post reported Wednesday. Administration officials are also weighing whether to withhold Trump’s signature from the customary joint agreement issued at the end of the G-7 summit.
Kudlow denied another element of the Washington Post report: that Treasury Secretary Steven Mnuchin had advocated a softer approach toward Canada, including an exemption from the metals tariffs. The story was “patently false” and inaccurately depicted a meeting in which Mnuchin didn’t even speak, Kudlow said.
Emerging markets struggling with higher U.S. interest rates are likely to get little sympathy from the Federal Reserve.
Currencies of such nations have been hammered in a spreading selloff amid worries that their economies won’t cope with higher U.S. borrowing costs. That’s prompted central bankers in India and Indonesia to raise interest rates and urge Fed caution, while officials in Brazil are bracing for challenging times too.
There are few signs such concerns will steer the Fed away from its course for at least two and possibly three more rate hikes this year, including a move at its policy meeting next week.
Chairman Jerome Powell explicitly pushed back against criticism early last month in Zurich, saying the role of U.S. monetary policy on foreign domestic financial conditions was “often exaggerated.” His colleague, Governor Lael Brainard, mentioned emerging markets in a May 31 speech, but spent far more time discussing the upside risks posed by fiscal stimulus.
“I don’t think they can change policy based on fear,” said Bricklin Dwyer, senior economist at BNP Paribas in New York. Emerging-market turmoil “is noise right now, justifiable noise. But does it shift the outlook for the U.S? The answer is, not yet.”
The U.S. economy is powering ahead, adding over a million jobs in the first five months of 2018. Inflation is at the central bank’s 2 percent target, and the Atlanta Fed’s gross domestic product tracking model suggests the economy grew a strong 4.5 percent in the second quarter.
Even if exports are tempered by foreign economic woes, trade fights, and a somewhat stronger dollar, some $1.5 trillion in fiscal stimulus and a $300 billion increase in federal spending are supporting domestic U.S. demand with “a huge tailwind,” said Torsten Slok, chief international economist at Deutsche Bank AG in New York.
The Fed is tasked with achieving stable prices and full employment. At 3.8 percent in May, unemployment is already well below estimates of full employment and recent forecasts show officials expect a modest overshoot of their 2 percent inflation target.
Meanwhile, the Fed’s benchmark lending rate is still low enough to stimulate growth, according to some measures, leaving officials with little choice but to keep raising it to a level that is more neutral in its impact on supply and demand.
It has also gone out of its way to communicate the plan for gradual rate increases and a shrinking balance sheet to avoid repeating the 2013 taper tantrum, when then-Fed Chairman Ben Bernanke surprised investors by suggesting the central bank might slow bond purchases.
Delaying policy tightening could also carry costs for emerging markets if it led to higher inflation that forced the Fed to act more aggressively, said Nathan Sheets, chief economist for PGIM Fixed Income.
“The Fed’s got to move,” said Sheets, a former U.S. Treasury undersecretary for international affairs. Officials are probably asking themselves, “over time, are we going to serve the global economy well by not responding to inflation?”
There have been occasions in the past when the Fed has paused in response to international developments. In 1998, for example, then-Chairman Alan Greenspan led the committee to cut rates three times to offset effects of spreading financial turmoil.
Greenspan warned during that period that “it is just not credible” that the U.S. remain “an oasis of prosperity.”
“He was wrong,” said Joe Gagnon, a senior fellow at the Peterson Institute for International Economics in Washington and a former Fed economist. “He eased 75 basis points and the economy, if anything, accelerated and the tech economy really took off.”
The bubble in technology stocks eventually burst at high cost to the U.S. economy.
In 2016, Fed officials set aside plans to raise rates four times over the year in reaction to financial-market turmoil triggered by concern over slowing Chinese growth. They hiked just once, but could also point to U.S. inflation that was running too low as a reason for their caution.
The Fed’s preferred gauge of price pressures averaged just 1.2 percent that year, while it hit 2 percent on a 12-month basis in both March and April 2018.
Fed officials do have an eye on Europe and emerging markets, “but at the end of the day, look at the employment report” in May, when the U.S. economy added 223,000 jobs, said Deutsche Bank’s Slok. “If anything, we should be worried about overheating, not a recession.”