The Washington PostDemocracy Dies in Darkness

The Finance 202: Fed's decision to cut rates is a sign Trump's tax cuts have fallen short

with Brent D. Griffiths


Federal Reserve Chair Jerome Powell ignored a question about whether President Trump's tax cuts have succeeded. But the central bank's decision to cut rates is a sign they haven't. 

The Republican architects of Trump’s tax cut said a big boost in business investment would prove the effort succeeded. That bump in corporate spending has failed to materialize nearly two years after the cuts passed into law and a new government report found it dropped 3 percent last quarter. 

Powell cited the drop as one of the factors that prompted the central bank to cut interest rates for the third time this year. 

The results render a harsh verdict on Trump's signature domestic achievement. “Compared to what was promised, I think the performance has been really lackluster and underwhelming,” Joel Prakken, chief U.S. economist for Macroeconomic Advisers by IHS Markit, tells me. “Or maybe more accurately, whatever impact this had has been swamped by other considerations.”

Namely, the cloud of uncertainty cast by the trade war has kept businesses watching and waiting rather than plowing investments into new structures, equipment and other gear that could help improve efficiency. Tax cut proponents said the law would unleash a flood of that spending, ultimately boosting productivity, which would raise profits and worker pay, laying the foundation for sustained economic growth. 

Research by Prakken’s firm found the trade war reduced business investment by about $40 billion in 2017 and 2018, shaving .2 percent off GDP in the process. “When you think about it, as long as that uncertainty is there, I don’t think any amount of tax incentive is going to have that big an impact,” Prakken says. 

Business investment is hardly the only category in which the tax cut is underperforming. Trump promised his signature domestic achievement would “lift U.S. sustained annual economic growth to 3%, or even as high as 6%. His advisers said it would boost average household incomes by at least $4,000 a year. His Treasury secretary said it would pay for itself,” the Wall Street Journal’s Greg Ip writes

It has fallen short on all counts. The deficit is nearing $1 trillion, a seven-year high, largely because of declining tax receipts, for example. And third-quarter GDP growth clocked in at 1.9 percent, indicating the economy is expanding at about its same pace before the tax cut. 

“Quite clearly, I think we can say what they promised is not going to come to fruition,” says Kyle Pomerleau, director of the Tax Foundation’s Center for Quantitative Analysis. “Most people in the tax policy community were saying that’s unrealistic even before the law passed.”

Powell said the central bank does not "see any evidence" that the recovery will weaken further. But he also signaled the Fed is done cutting interest rates for the time being. “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” he said

Tim Duy, the University of Oregon economist, writes on his Fed Watch blog that Powell is effectively declaring victory after the Fed’s series of rate cuts. “Such a ‘policy pause’ forecast feels like a good baseline going into the end of the year,” he writes. “After a fairly hectic year, Powell and his colleagues are moving off to the sidelines.”


Stocks notch record high. CNBC's Fred Imbert: Stocks rose on Wednesday as investors cheered the Federal Reserve’s third rate cut of the year and comments from Chairman Jerome Powell that signaled it would be a while before the central bank hikes rates.The S&P 500 hit an all-time high, climbing 0.3% to 3,046.77. The Dow Jones Industrial Average closed 115.27 points higher, or 0.4% at 27,186.69. The Nasdaq Composite ended the day up 0.3% at 8,303.98... Stocks moved to their highs of the day after Powell said in a press conference after the decision that the central bank would need to see a 'really significant' rise in inflation before the Fed thought about hiking."

Hong Kong slides into recession. Bloomberg's Eric Lam and Enda Curran: "Hong Kong’s economy contracted sharply in the third quarter as it entered a recession, exceeding economists’ worst estimates of the damage from nearly five months of protests. Third-quarter gross domestic product retreated 3.2% from the previous three months, after a 0.4% contraction in the second quarter. That’s the worst slump since 2009, in the aftermath of the global financial crisis. Two consecutive periods of negative growth mean Hong Kong has fallen into a technical recession.

"The economic debate now is focused on how long the downturn will last, if recent glimmers of stabilization point to a bottom, and if the U.S.-China trade war and the demonstrations have done lasting damage."



China skeptical of long-term trade pact with Trump. Bloomberg's Shawn Donnan, Jenny Leonard and Steven Yang: "Chinese officials are casting doubts about reaching a comprehensive long-term trade deal with the U.S. even as the two sides get close to signing a 'phase one' agreement. In private conversations with visitors to Beijing and other interlocutors in recent weeks, Chinese officials have warned they won’t budge on the thorniest issues, according to people familiar with the matter. They remain concerned about [Trump’s] impulsive nature and the risk he may back out of even the limited deal both sides say they want to sign in the coming weeks.

"Chinese policy makers are gathered in Beijing for a key political meeting that’s set to conclude on Thursday. In meetings ahead of that plenum some officials have relayed low expectations that future negotiations could result in anything meaningful -- unless the U.S. is willing to roll back more of the tariffs. In some cases, they’ve urged American visitors to carry that very message back to Washington, the people said."

— Chile cancels conference where China deal might have been signed: “Chile has canceled a pair of major global summits on the economy and environment in the coming weeks amid unrest in Santiago, scrambling [Trump’s] hopes of signing a first-step trade deal with China at one of the events,” my colleagues David Nakamura and Brady Dennis report.

“Trump was scheduled to attend the Asia Pacific Economic Cooperation forum in Santiago from Nov. 15 to 17. White House officials said he was planning to meet with China’s President Xi Jinping in a bid to lock in details of a ‘phase one’ trade pact that could ease tensions between the economic powers and lay the groundwork for a bigger trade deal next year.” 

… But Treasury Secretary Steve Mnuchin says a deal is still likely to be signed in November: “Before the announcement, Mnuchin said the United States was ‘looking forward to President Trump and President Xi signing Phase 1 of our important trade agreement later next month when they’re together in Chile,’ adding, ‘I think that would be an important economic achievement for both of us.’ ”

— Starbucks stock jumps on U.S. and China sales: “Starbucks “reported quarterly revenue that topped analysts’ expectations as cafes in the U.S. and China attracted more customers,” CNBC’s Amelia Lucas reports.

“The company reported global same-store sales growth of 5%. Both the U.S. and China, its two biggest markets, reported strong same-store sales and increasing traffic.”

Chinese Manufacturing Slumps to Eight-Month Low (WSJ)


— The bellwether counties of a recession: "Why do we care how Robertson County, Tenn., Pontotoc County, Miss., Boone County, Ill., and Elkhart County, Ind., are doing, or how much they have in common? Because, in addition to manufacturing big-ticket luxuries beloved by the middle class, they have predicted every recession since 1975. Their 12-month average employment numbers always fall before a wider downturn begins," my colleague Andrew Van Dam reports.

"What can we learn from them today? Our most recent numbers, from early this year, show them bending south, but not cratering. But local officials remain upbeat, and it’s too early to tell if the counties are preparing to slip ahead of a downturn, or if any hint of weakness is just a temporary hiccup."

  • Why these four?: "... Unlike many others that weaken before the broader economy, they have shown strong job growth in recent decades. Their past downturns were exceptional and thus struggles there might plausibly signify something bigger. And the implications are immense. These four counties won’t determine the next election. But the economy they inform us about will."

— Twitter to ban all political ads: Twitter “said it would ban all advertisements about political candidates, elections and hot-button policy issues such as abortion and immigration, a significant shift that comes in response to growing concerns that politicians are seizing on the vast reach of social media to deceive voters ahead of the 2020 election,” my colleague Tony Romm reports.

“Twitter CEO Jack Dorsey announced the shift in policy in a series of tweets, stressing that paying for political speech has the effect of ‘forcing highly optimized and targeted political messages on people.’ The move marks a break with Twitter’s social-media peers, Facebook and Google-owned YouTube, which have defended their policies around political ads in recent weeks.

  • What a subtweet: Dorsey’s announcement came as Facebook was unveiling its earnings report.

— Lawsuit claims Juul put 1 million tainted pods into the market: “A former executive contends in a new lawsuit that Juul released 1 million tainted vaping pods into the market, then failed to warn retailers and consumers,” my colleague Taylor Telford reports.

“Siddharth Breja, who had been the vice president of global finance, claims in a lawsuit filed Tuesday that he was ‘inappropriately terminated’ in March, days after raising concerns about a shipment of mint-flavored refill kits and for protesting the company’s refusal to alert the public. The suit also alleges that Juul breached several California business regulations … Juul is already facing scores of lawsuits and federal scrutiny stemming from allegations it created a youth vaping epidemic.”

— Fiat and PSA agree to merge: “Fiat Chrysler Automobiles NV and Peugeot maker PSA Group of France have agreed on the terms of a merger that would create one of the world’s largest auto makers by volume with a market value of $48.4 billion, said people familiar with the situation,” the Wall Street Journal’s Eric Sylvers, Ben Dummett and Nick Kostov report.

“The boards of Fiat Chrysler, Peugeot and Exor NV, the Agnelli family holding company that controls the Italian-American car maker, approved the deal on Wednesday, the people said. Fiat Chrysler Chairman John Elkann is slated to become chairman of the newly merged company while Peugeot Chief Executive Carlos Tavares would be CEO. Both would have seats on the board of the new company, which would comprise six Peugeot appointees, including Mr. Tavares, and five from Fiat Chrysler.”


— Boeing CEO grilled for second day: House Democrats “revealed key documents from their investigation into the deadly crashes of two 737 Max jets, pressing Boeing’s chief executive for more answers as he returned to Capitol Hill for a second day of hearings punctuated by sharp exchanges and incredulous reactions from lawmakers,” my colleagues Ian Duncan, Michael Laris and Lori Aratani report.

The “hearing was far more intense than Muilenburg’s appearance before a Senate committee Tuesday. He sat almost level with families of the crash victims, who groaned at Muilenburg’s repeated evocation of his boyhood on an Iowa farm and were angered when Hamilton stumbled over the date of the second crash. Lawmakers raked through the documents they had gathered, asking Muilenburg to account for opportunities seemingly missed to avert the crashes. One congressman returned for several rounds of questioning to establish a single fact, while others assailed Muilenburg for taking home $30 million last year.”



  • Fiat Chrysler, Re/Max Holdings, Bristol-Myers, Clorox, Cigna, DuPont, Altria, Royal Dutch Shell, Sirius XM and Sanofi are among the notable companies reporting their earnings




Nats win the World Series! The Post's Dave Sheinin and Sam Fortier: "Suddenly, it was all over, and the blue-jerseyed visitors were spilling and screaming out of every corner of Minute Maid Park — from their dugout along the third base line, the bullpen in left field, the expanse of outfield, all four corners of the diamond — and converging upon the joyous pile of humanity forming near the center. Once the Washington Nationals had no more giant mountains to climb, they took the small dirt hill of the pitcher’s mound, and they hugged and bounced.

"With one more comeback win, at the end of a comeback season for the ages, the Nationals were World Series champions. A 6-2 victory over the Houston Astros in Game 7 on Wednesday night sealed it, delivering the first baseball title for the nation’s capital since Walter Johnson’s Senators won their only one in 1924."

Here's a look at the end of the game and its aftermath: 

The Nationals became the first team in major league history to win the World Series on Oct. 30 by claiming four games on the road. (Video: The Washington Post, Photo: Katherine Frey/The Washington Post)

From the Nats's Twitter feed: 

From ABC News producer Chris Donovan: