Why D.C.’s Policy Pronouncements are the Key to Economic Growth

August 26, 2019 at 9:05 am Leave a comment

Good morning folks, I hope everyone had a nice weekend. I have spent a good chunk of it pulling the remaining hairs out of my head. Whether you agree or disagree with his decisions, the reality is that I can think of no period in my lifetime where the actions of the President have had a more direct and immediate impact on the economy. This means that now, more than ever, those of you responsible for positioning your financial products and services are more dependent on the whims of Washington than ever before, and this is not a good thing.

In 2016, the NCUA began implementing a new framework for evaluating interest rate risk. However, how can one evaluate interest rate risk caused by the comments and behavior of the President of the United States? On Friday, he responded to news that China would be raising tariffs by announcing harsher retaliatory tariffs on our most important trading partner. He suggested that the chairman of the Federal Reserve Board, Jerome Powell, was an enemy of the United States. He then ordered companies to cease dealings with China. This is not normal behavior, and it is having a direct impact on how you go about doing your business.

Right now, views on the economy can be split into two camps. There are those who believe that the economy is fundamentally strong, and will remain so at least into 2021; and those who believe that the economy is weakening as the effects of the tax cuts wear off and a long running economic expansion comes to an end. If you are of the former camp, then interest rates should stabilize and it makes no sense for the fed to cut rates. Conversely, if you are of the latter camp, then of course the fed should be cutting rates. It should probably be doing so even more aggressively than it has indicated it is inclined to. No matter what camp you belong to, the uncertainty brought about by the President’s comments are in no one’s interests. Interest rates are the nerve ending of the economy, and the natural reaction to potential pain is to recoil.

Then the yield on the ten year treasury crashed, and no one should be surprised. The result has been a rush to refinance mortgages. While this might be good in the short term, it could also have a hugely negative impact on the value of servicing portfolios and net interest margins.

Consider the trade war. Again, I am not here to take a side one way or the other on this issue. I only seek to point out that as it continues and potentially expands, there is a drag on the economy, as Jim Nussle would like to point out in his interview on Thursday. Even if people believe that the short term pain of higher tariffs is worth it in order to readjust our relationship with China, tariffs are ultimately paid by the American consumer in the form of higher cost for products, or indirectly in the former of lower margins for companies. The bottom line is this: much of what concerns me about the economy could end up not being a concern at all.

Perhaps China and the President will stop playing this game of chicken with the world economy. The stock market will respond favorably and interest rates will rebound as consumers look around and realize that things are going well. We can all live happily ever after. However, the very fact that we are now so dependent on the actions of Washington, not only in terms of the long term stability of the economy, but in terms of its day to day functioning, should be troubling and presents incredibly complex challenges for anyone responsible for charting the course of a credit union, even six months ahead. Captain Obvious here, make sure you renew that subscription to the Wall Street Journal and sign up to get the President’s twitter feed. We are now more dependent on Washington than ever before, and that is not a good thing.

Entry filed under: Economy. Tags: , , .

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Authored By:

Henry Meier, Esq., Senior Vice President, General Counsel, New York Credit Union Association.

The views Henry expresses are Henry’s alone and do not necessarily reflect the views of the Association. In addition, although Henry strives to give his readers useful and accurate information on a broad range of subjects, many of which involve legal disputes, his views are not a substitute for legal advise from retained counsel.

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