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Donald and Jerome's Excellent Economic Adventure -- Heard on the Street

25 Mar 2018 2:00 pm
By Justin Lahart 

With business growing briskly and the unemployment rate low, the U.S. economy is in good shape. Federal Reserve policy makers, therefore, had no qualms about raising interest rates on Wednesday, as well as projecting that they will be more aggressive in the future.

In contrast, other officials in Washington have taken the types of steps you might expect to see if the economy were battling a recession.

First, President Donald Trump on Thursday announced plans to levy tariffs on billions in Chinese imports, the latest escalation in trade tensions. On Friday tariffs announced earlier on steel and aluminum imports took effect. What is odd about these moves, Goldman Sachs economists point out, is that trade actions more typically happen when unemployment is rising and cries for protectionism among displaced workers are heard more loudly.

Second, Congress passed a $1.3 trillion spending bill on Friday, the first installment of a budget agreement struck last month that will boost federal spending by $300 billion over two years. That will provide another boost to the economy, in addition to the tax cuts that got passed late last year. Again, this is the type of fiscal stimulus one ordinarily would expect to see in response to a recession. Such stimulus efforts often come late, hitting as the economy has already begun to recover, but the last recession ended in 2009.

The merits of the tariffs and the government spending and tax cut stimulus are matters of dispute. Coming at such an unusual point in the economic cycle makes it hard to figure out what their ultimate effects will be.

Standard economic theory holds that tariffs dent the economy whenever they come since the higher prices they usher in hurt consumers more than they benefit domestic producers. Theory and reality don't always dovetail, however. It is hard to know how things will play out at this stage, when there is little apparent slack in the labor market. They may induce more inflation than usual, but that supposes that companies selling tariff-affected goods can pass through their higher costs to consumers.

Then there is the stimulus. One view is that it will provide less bang for the buck than it would have earlier in the economic cycle since the aforementioned lack of slack will make it more inflationary, spurring faster Fed rate increases. That said, interest-rate projections the Fed released on Wednesday were only modestly higher than in September, before the tax cut and spending plans were in place.

It all makes for an interesting experiment. The U.S. economy gets to be the guinea pig.

Write to Justin Lahart at justin.lahart@wsj.com

(END) Dow Jones Newswires

March 25, 2018 10:00 ET (14:00 GMT)

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