The Wall Street Journal - 22.08.2019

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A person who in 1990

bought $100,000 of stock that

is now worth $1 million would

pay taxes on $900,000 in cap-

ital gains under current law.

In some editions Wednesday,

a Page One article about

White House efforts to bolster

the economy incorrectly gave

the second number as

$900,000 million.

Sun Title company re-

ceived a bogus cashier’s check

for $185,000 in the mail as

part of a wire-transfer scam.

A Mansion article on Friday

about financial fraud incor-

rectly said the title company

received a certified check.

Readerscan alert The Wall Street Journal to any errors in news articles by

emailing [email protected] or by calling 888-410-2667.

CORRECTIONSAMPLIFICATIONS

mainsexceptionally low, eco-

nomic growth and hiring have

slowed in recent months and

some warning signs are flash-

ing in bond markets. Most no-

tably, long-term interest rates

at times have dipped below

short-term rates, something

that has telegraphed recessions

in the past and spooked inves-

tors in recent weeks.

Wednesday’s economic re-

ports included some troubling

new signs. U.S. job growth was

weaker in the year through

March than previously

thought, government econo-

mists said. The Labor Depart-

ment lowered its estimate of

total U.S. employment in

March by 501,000, or 0.3%.

That brought down the average

monthly increase in payrolls

over the period to about

168,000 from 210,000—still

solid but not as robust as once

thought.

Other government data revi-

sions in recent weeks also

pushed down estimates of

growth and corporate profits.

But it wasn’t all bad news:

Sales of previously owned

homes picked up in July, the

National Association of Real-

tors said Wednesday, a sign

that lower mortgage rates may

be driving sales after a weak

spring selling season. Some re-

tailers also reported good

profit numbers, another sign

that households remain a pillar

of the economy.

The Dow Jones Industrial

Average rose 240.29 points

Wednesday, or 0.93%, to

26202.73. It had surpassed

27000 in July, when downturn

worries started to concern in-

vestors.

Academic research cited by

top Fed officials in the past

says that the central bank

should move quickly to cut

short-term rates in moments

when it has little room to ma-

neuver and the economy might

be heading for a slide.

The Fed’s target rate is just

over 2%, leaving far less room

to cut aggressively than in the

past. But officials at the central

bank aren’t yet convinced that

drastic action is needed. More-

over, the Fed’s ranks are di-

vided about what steps to take.

Fed minutes from its July

30-31 meeting released

Wednesday showed several of-

ficials favored holding rates

steady because they judged

“that the real economy contin-

ued to be in a good place.”

Two of those officials dis-

sented from the decision to cut

rates by a quarter percentage

point. But two other officials

favored a more aggressive half-

point cut, which they said

would better address “stub-

bornly low” inflation.

The minutes also showed

the officials believed uncer-

tainty surrounding the Trump

administration’s trade policy

wasn’t likely to let up anytime

soon, creating a “persistent

headwind” for the U.S. eco-

nomic outlook.

Many business executives

have said the uncertain outlook

for U.S. trade policy could be

holding back the economy.

With the U.S. locked in sharp

disagreements with China over

a range of issues, that might

not get resolved soon.

Washington’s appetite for

budget deficits could be tested

by a slowdown or recession.

Federal spending tends to rise

in a recession because manda-

tory payments on programs

like unemployment insurance

goes up. Meantime, tax re-

ceipts tend to slow as house-

hold income growth and busi-

ness profits slow or decline.

On top of all of that, cutting

taxes or increasing spending to

kick-start growth could be a

challenge since both can boost

deficits. Federal deficits are

projected to grow much more

than expected over the next

decade thanks to the two-year

budget agreement lawmakers

and the White House struck

last month, the Congressional

Budget Office said Wednesday.

The agency boosted its fore-

cast of cumulative deficits over

the next decade by $809 bil-

lion, to $12.2 trillion. That

means an additional $12 tril-

lion of debt on top of the $

trillion already outstanding.

—Kate Davidson, Josh

Mitchell and Alex Leary

contributed to this article.

“I’m not looking to do index-

ing,” he said. “I think it will be

perceived, if I do it, as some-

what elitist...I want tax cuts for

the middle class, the workers.”

He added that it was an option,

but “not something I love.”

On Tuesday, speaking to re-

porters in the Oval Office, the

president said he had been

“thinking about payroll taxes

for a long time” and that in-

dexing was “something I’m

thinking about.” He added, “I

would love to do something on

capital gains.”

White House officials, mean-

while, said the administration

has long been examining a

range of tax cuts as part of

what Republicans have termed

“Tax Cuts 2.0,” though no pro-

posals are expected imminently

and such a measure is unlikely

to go anywhere in Congress.

The president also has been

pressuring the Federal Reserve

to cut interest rates at a clip

typically only seen when the

economy is severely struggling.

On Wednesday morning, Mr.

Trump compared Fed Chair-

man Jerome Powell, his own

choice for the post, to a “golfer

who can’t putt.”

Though unemployment re-

ContinuedfromPageOne

Options

Limited if

Slump Hits

years.

Overall, the CBO said gov-

ernment debt as a share of the

economy is expected to rise

from 79% this year to 95% in

2029—up from 92% when the

agency released its 10-year

forecasts in May and the high-

est level since just after World

War II, when debt exceeded

the size of the economy.

“The nation’s fiscal out-

look is challenging,” CBO Di-

rector Phillip Swagel said.

“To put it on a sustainable

course, lawmakers will have

to make significant changes

to tax and spending policies—

making revenues larger than

they would be under current

trade or tariffs were men-

tioned 2.6 times as often as

the Fed or interest rates.

These analyses obviously

simplify matters. They don’t

prove trade caused the mar-

ket’s or the economy’s stum-

bles, or that the Fed didn’t.

Setbacks for technology

companies and slowing

growth in the eurozone and

China have also preoccupied

investors. And all these in-

teract: global growth may be

suffering from the effects of

higher U.S. interest rates

which squeeze countries that

borrow in dollars, and from

the trade war, on top of the

U.K.’s planned exit from the

European Union and China’s

efforts to reduce debt.

T

helate economist

Rudi Dornbusch once

said business expan-

sions don’t die of old age,

they’re murdered by the Fed.

Many liberal economists

with not a lot of love for Mr.

Trump share his conviction

that Fed Chairman Jerome

Powell has recklessly raised

rates out of a misguided ob-

session with inflation.

This is hard to square

with events. Mr. Powell was

the most dovish candidate

Mr. Trump considered for

the job, aside from then-

Chairwoman Janet Yel-

len. This Fed rate increase

cycle has been the most

gradual in 30 years, except

1999 to 2001, when rates

started out much higher, ad-

justed for inflation.

Many economists, and

some of Mr. Powell’s col-

leagues, do think the Fed’s

last rate increase in Decem-

Economists

see recessions

as complex

phenomena

with multiple

causes. Histo-

rians and the public prefer

simple narratives. So while a

recession remains for now

more risk than reality, the

fight over the narrative is

well under way.

Thus, President Trump’s

intensifying criticism of the

Federal Reserve seems in-

tended not just to get lower

interest rates, but to saddle

the central bank with the

blame if the economy does

slide into a recession.

B

uthistory and head-

lines suggest it’s a los-

ing battle: for inves-

tors and businesses, the Fed

is less of a preoccupation

than the trade war for which

Mr. Trump has claimed

credit.

This doesn’t make the Fed

blameless. After all, rising

interest rates have accompa-

nied every postwar reces-

sion. Yet recessions often

happen when an economy,

already slowing because of

tighter monetary policy, is

hit by an additional shock. In

1929, it was the stock-market

crash; in 1973, the Arab oil

embargo; in 2001, the col-

lapsing tech bubble and 9/

terrorist attacks, and in

2007 and 2008, the global fi-

nancial crisis struck. Those

are what people remem-

ber, not what interest and

exchange rates were doing in

the background.

In the past year, the trade

war has had a comparable

grip on the public imagina-

tion, not just politically but

in markets and boardrooms

where cold financial calcula-

tions prevail. Of the 20 larg-

est percentage declines in

the S&P 500 stock index in

the past 12 months, trade

was the main—or one of the

main—causes in six, accord-

ing to financial news reports.

It fell 3.2% on Dec. 4, for ex-

ample, when hopes of a

trade deal between the U.S.

and China faded and Mr.

Trump declared on Twitter

that “I am a tariff man,” and

it dropped 3% on Aug. 5

when China let the yuan

drop in response to new

American tariffs. The Fed

was cited as a cause in just

four cases.

Corporate executives have

also been far more preoccu-

pied with trade than mone-

tary policy. Prattle, an in-

vestment research firm,

analyzed the content of cor-

porate earnings calls since

May 1 last year and found

ber was a mistake—and less

sustainable when other cen-

tral banks are lowering

rates. If so, Mr. Powell cor-

rected it quickly, scrapping

plans to raise rates further

and then, in July, cutting

them.

Indeed, the frequency

with which the Fed bore the

blame in the market narra-

tive receded between 2018

and 2019. The same pattern

appears in the bond market.

There, long-term bond yields

have dropped below short-

term rates, a so-called in-

verted yield curve that has

preceded most recessions.

Four of the 10 largest one-

day drops in the 10-year

Treasury yield in the past 12

months were driven by trade

news—all in the past four

months—for example on May

30 when Mr. Trump threat-

ened Mexico with escalating

tariffs over illegal immigra-

tion and on Aug. 1 when he

announced new tariffs on

$300 billion of Chinese im-

ports.

These shocks may do

what Mr. Trump has been

demanding, which is per-

suade the Fed to cut rates

sharply. While the Fed has

no official view on trade

wars, it has a pretty strong

one on recessions: It will do

what it can to prevent one.

TenlargestdailydropsintheS&P500 Effectivefederal-funds-rateincreasecycles

overthepast12months

%

0

Monthssince beginning of cycle

10 20 30 40

0

2

4

6

8

10

2015-present

2004-

1999-

1994-

1995

Oct. 10 1988-

Dec. 4

Oct. 24

Aug. 5

Aug. 14

Dec. 24

Jan. 3

May 13

Dec. 7

Dec. 17

Tech/ Fed

Trade

Tech, global growth

Trade (yuan devaluation)

Global growth, trade,

yield curve

Global growth, trade

Apple earnings warning

Trade

Jobs data

Fed

-3.3%

-3.

-3.

-3.

-2.

-2.

-2.

-2.

-2.

-2.

Date Pct.drop Reasonfordrop

TheSlowdownNarrative

Market drops have been driven more often by trade than Federal Reserve news, and Fed

tightening has been historically mild.

Sources: Factset, Factiva (market drop), Federal Reserve Bank of St. Louis (Fed funds rate)

unlikelyto face new competi-

tion because only Congress

could break up the firms’ ef-

fective duopoly.

Any move to recapitalize

and then release the firms

would be a victory for hedge

funds and other investors that

have been betting on Fannie

and Freddie’s return to privat-

ization for years. Privatizing

them would likely take several

years and would involve allow-

ing the firms to retain earn-

ings and raise tens of billions

of dollars from investors.

The plan, a priority for the

Treasury Department, has

been in the works for months

and was expected earlier this

summer. Its completion was

delayed in part by revisions

from the Department of Hous-

ing and Urban Development,

the people said. Craig Phillips,

a former top Treasury official

who had been leading that de-

partment’s work on the pro-

posal, left in June.

Fannie and Freddie don’t

make loans but instead buy

them from banks and other

lenders. They package them

into securities that are sold to

investors and provide guaran-

tees in the event of default.

As part of the draft plan to

return Fannie and Freddie to

private hands, a Treasury

backstop could remain. But

the firms could begin paying a

periodic commitment fee for

the federal line of credit, The

Wall Street Journal previously

reported.

WASHINGTON—The Trump

administration is preparing to

release as early as the first

part of September its long-

awaited plan to return Fannie

Mae and Freddie Mac to pri-

vate-shareholder ownership,

according to people familiar

with the matter.

The proposal comes more

than a decade after the gov-

ernment seized the mortgage-

finance firms to save them

from collapse. It would likely

seek to put the companies on

a sounder financial footing

and then release them from

government control if Con-

gress doesn’t enact a more

fundamental overhaul in the

meantime, these people said.

The plan, which could be

floated shortly after the Labor

Day holiday, is expected to en-

vision a version of what has

been called “recap and re-

lease,” which would ensure the

firms have adequate capital to

absorb loan losses in a future

housing slump. Its provisions

aren’t expected to give details

for initial public offerings for

the firms, the people said.

If the proposal is carried

out, the firms could ultimately

return to the way they oper-

ated before the financial crisis.

While administration officials

would prefer that Congress act

on a more sweeping overhaul

of housing finance, split power

in Congress leaves lawmakers

unlikely to act. The firms are

BYANDREWACKERMAN

Fannie, Freddie Plan

law, reducing spending below Is Likely Next Month

projected accounts, or adopt-

ing some combination of

those approaches.”

Lawmakers have shown lit-

tle appetite, however, for

reining in federal spending or

raising taxes. Investors are

unfazed by the rising govern-

ment red ink.

The latest budget deal,

which lifts spending by

roughly $320 billion over the

next two years above spend-

ing caps enacted in 2011, re-

ceived broad bipartisan sup-

port, even as fiscal hawks

warned it would enshrine

trillion-dollar deficits.

Higher spending on disas-

ters and border security in

2019 also boosted projected

deficits by $255 billion over

the next 10 years, assuming

that spending continues to

grow, the CBO estimated.

Deficits typically shrink

when the economy is doing

well, as low unemployment

and rising wages push up tax

revenues for the government,

and automatic spending on

safety-net programs such as

unemployment insurance de-

clines.

Instead, deficits as a share

of the economy have been

rising despite an uptick in

economic output, due in part

to weaker federal revenues

following the 2017 tax law,

higher federal spending on

the military and retiree bene-

fits and rising interest costs.

Although government re-

ceipts have begun to pick up

18 months after the 2017 tax

cuts took effect, they haven’t

kept pace with rising federal

spending or broader eco-

nomic growth.

The Treasury Department

said earlier this month the

U.S. budget gap has widened

by 27% in the first 10 months

of the fiscal year, which be-

gan Oct. 1, 2018.

Higher deficits have also

led the government to ramp

up borrowing over the past

two years: Treasury esti-

mated it will borrow more

than $1 trillion in 2019 for

the second year in a row.

Meanwhile, the risks of a

deepening economic downturn

appear to be rising abroad and

could be spreading to the U.S.

economy, as heightened trade

tensions and slower global

growth weigh on economic ac-

tivity.

The CBO said Wednesday

higher tariffs are expected to

reduce the level of U.S. GDP by

0.3% by 2020, primarily by

raising prices, which reduces

consumers’ purchasing power

and increases the cost of busi-

ness investment.

WASHINGTON—Federal

deficits are projected to grow

much more than expected over

the next decade after a budget

agreement struck last month,

pushing government debt as a

share of the economy closer to

the highest level since World

War II, the Congressional Bud-

get Office said.

The deal agreed upon by

congressional leaders and the

White House will add roughly

$1.7 trillion to deficits be-

tween 2020 and 2029, assum-

ing federal spending continues

to rise by the rate of inflation

beyond 2021. Much of that in-

crease will be offset by lower-

than-expected interest rates,

which will reduce the cost of

servicing the government’s

debt by $1.4 trillion over the

next decade, the CBO said in

the updated projections.

In total, deficits are now ex-

pected to rise $809 billion

more than the agency pro-

jected just a few months ago,

bringing total deficits over the

next decade to $12.2 trillion.

Annual deficits as a share

of economic growth are ex-

pected to average 4.7% over

that period, higher than the

4.4% the CBO estimated in

May and well above the 2.9%

average over the past 50

BYKATEDAVIDSON

Budget Deal Will Pump Up Deficit

Forecasts: May August

FY2020 ’22 ’28’26’

1.

1.

1.

0.

0.

0.

$

Note: Fiscal year ends Sept 30.

Source: Congressional Budget Office

Projectedbudgetdeficit,

intrillionsofdollars

Democrats and

Republicans don’t

agree on how best to

rev up the economy.

A2|Thursday,August22, 2019 ** THEWALLSTREETJOURNAL.**

U.S. NEWS

CAPITALACCOUNT|ByGregIp

Trade War Leaves a Bigger Mark Than Fed