Making sense of Trump's tweet about the Fed and China
President Trump tweeted an interesting combination of truth, non-sequiturs and lies on Tuesday involving China and the Federal Reserve.
"China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go...
"...up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!"
Reality check: China added stimulus to its economy recently, but it's quaint compared to the military industrial and farm-aid spending added by the U.S. under Trump. China's stimulus has also come largely from the fiscal side — tax and fee cuts and looser lending standards — rather than the central bank.
- China's central bank has reduced the reserve requirements ratio (RRR) for banks, but has not lowered its policy rate — the thing Trump is calling on the Fed to do — since October 2015. China's central bank policy rate is about 2% higher than the U.S. rate.
- China's RRR — 14% for large institutions and 12% for small ones — even after recent cuts is significantly higher than that of the U.S. (10% and 3%).
- The Fed raised rates in 2015 for the first time in nearly a decade and has backed off of the expected quantitative tightening it was set to engage in this year.