Before even reading the content of the article, I got an idea of what exactly it may be talking about. With a more globalized world, the valuation of a country’s currency is extremely important. A devalued currency usually leads to a boost in manual labor jobs such as manufacturing because the country becomes more attractive to those types of companies. This is why China used to devaluate their currency which allowed them to wipe away the competition in terms of manufacturing and trade. I also know (from reading articles) that the current administration favors a weaker dollar because of the reasons stated above.
After reading the article, I believe that the biggest thing I have come away with is that steel and aluminum tariffs are a big determinant for many areas of the economy such as the stock market and where jobs are going. In my opinion, I believe the reaction to the tariff talk was kind of overwhelming, as steel tariffs happened before under both Reagan and Bush II. Additionally, the President made it clear that he would likely enact tariffs during several speeches he gave when campaigning, so it should not be very shocking that the administration is looking to try and decrease the trade deficit. What is wrong with tariffs, however, is that they act as an extra charge on consumer spending, which would likely lower economic performance (the Real GDP per Capita). Still, I think another reason these tariffs were floated by the administration is because we are currently in talks with Mexico and Canada for a newly revised NAFTA agreement. This is probably a negotiating tactic being used. However, I can see why the rational investor would react rather negatively to these talks of tariffs, as they have proven to hurt countries’ economies since they act as a tax hike on consumers.
Another area of the article that I found interesting was that the U.S. dollar would be weaker than the euro. This would, of course, lead to an increase of competition between the United States and other countries such as China, Japan, Germany, and others. There are still many problems with the European Union, but things may be looking up if this article comes to fruition. Additionally, there are talks of high inflation, or an inflationary gap, in the United States’ economy. This tends to happen when there is widespread economic growth, and the reverse happens when there is a recessionary gap, or when the economy underperforms its potential. This is very important to understand because it is the entire philosophy of the Federal Reserve. When you want to try and decrease unemployment, the inflationary gap will tend to widen. When you want to decrease inflation, the unemployment rate will increase. Of course, there will always be an unemployment rate, as frictional unemployment (job searches as an example) will always exist. In fact, when an economy is very good, frictional unemployment may increase since people are more confident that they’ll find a job. Therefore, they will stay out of work a bit longer to compare offers. This is the reverse of structural unemployment, which results from a reorganization of the industry such as automation. Automation has led to a depressed workforce in many areas of the United States and Europe.
Why is it important to understand the relationship between the unemployment rate and inflation rate? The reason for this is that it helps determine Fed monetary policy. Previously under then-President Obama, we had Janet Yellen as the Fed chair. Yellen was a dove, or someone who was more lenient on interest rates because they wanted to help decrease the unemployment rate. Now that the economy is improving, this administration has put in Jerome Powell as the chair of the Fed. Powell is considered to be more of a hawk, or someone more concerned with high inflation. Because of this, interest hikes may occur as the article said. This obviously caused the stock market to react after Powell said that was a possibility that we could see a couple interest rate hikes. In my opinion, I am fine with the hikes, as high inflation has long-term consequences which can really hurt an economy and future generations.
- How Inflation and Unemployment Are Related. (2016, September 01). Retrieved March 08, 2018, from https://www.investopedia.com/articles/markets/081515/how-inflation-and-unemployment-are-related.asp
- R. (2018, March 06). Dollar Still Losing Battle With Euro Despite Fed Outlook-Reuters Poll. Retrieved March 08, 2018, from https://www.nytimes.com/reuters/2018/03/06/business/06reuters-forex-poll-euro.html