Top Stories
Top Stories
Opinion - Politics

A Fed rate cut could give Trump another weapon in the trade war with China

Jerome Powell and President Donald Trump during a nomination announcement in the Rose Garden of the White House in Washington, D.C., U.S., on Thursday, Nov. 2, 2017.
Andrew Harrer | Bloomberg | Getty Images

Something funny is happening during this U.S. economic boom: President Trump keeps saying we still need an interest rate cut.

Between a steady stream of "better than it's ever been" boasts about the U.S. economy's strength, Trump still sends a regular tweet or two per week accusing the Fed of hurting the economy by raising rates last year.

But does that even make sense? Isn't the Fed supposed to make sure economic expansions don't get too hot and prompt inflation or create a bubble? How much more can the economy expand solely because of a rate cut or two anyway?

Sometimes you just have to read a bit between the lines to see what his real intentions are. In this case, you don't have to do too much detective work to see that Trump's hard campaigning for lower federal funds rates isn't about raising the GDP, lowering unemployment or increasing wages. At least not directly.

The real reason is this: Trump wants lower rates as a weapon to use against China in the trade war.

The president has openly complained, also mostly on Twitter, about Chinese and European currency manipulation. The argument is that other nations do this to keep their exports competitively priced compared to American goods despite tariffs and other duties.

This kind of manipulation appears to be exactly what China is doing to mitigate the worst effects of the Trump tariffs. The data prove it. U.S. import prices, including prices of goods from China, have been on the decline in recent months.

To be sure, this currency move is still hurting the Chinese economy. But the likely bet in Beijing is that it's worth not losing market share in the U.S. for several key Chinese products. Once American consumers and businesses start finding domestic or other non-Chinese made products to buy and get used to, then Beijing is really in trouble.

To respond to that, Trump wants a weaker dollar that would make China have to dig even deeper to match lower U.S. prices. A Fed rate cut or two could weaken the dollar to a level where Beijing simply couldn't drop the yuan much lower in comparison.

It's a matter of debate whether eliminating or watering down China's currency manipulation advantage would be a decisive blow in the trade dispute. But a bigger question many investors and political experts are asking is whether the Fed should even be playing that role in the trade war at all.

Winning the trade war is something the Trump administration believes would boost the U.S. economy and employment for years to come. So an argument could be made that having the Fed weaken the dollar to win this dispute is part of its overall mission to protect the U.S. economy.

Fed Chairman Jerome Powell certainly hasn't slammed the door on the idea. In June, he made a very broad statement about how the Fed would act "as appropriate" in the face of the trade war risks. But as it is with a lot of statements from Powell and his predecessors, that comment can mean a lot of different things to different people.

It's important here to note that two of the top people on the front lines of the trade war for the president are Director of Trade and Manufacturing Policy Peter Navarro and U.S. Trade Representative Robert Lighthizer. Both believe tariffs don't necessarily hurt the country that imposes them and should be used more often. Many of Trump's tweets praising tariffs appear to have been greatly influenced by Navarro and Lighthizer.

But the traditional economists at the Fed are much more likely to see tariffs as a major threat, even though the U.S. economy as a whole has yet to suffer the kinds of dire consequences many pundits predicted it would have by now in this tariff war. That fear of economic harm yet to come is a big reason why the Fed is indeed expected to cut rates by 25 basis points this coming Wednesday.

Think about that for a minute. Trump's top trade economists are in current stark disagreement with the economists at the Fed. And as a result of that dispute, Trump is likely to get what he wants in the end.

It will be important to look at the Fed's decision next week and its future decisions within the context of trade first. The usual discussions about inflation and unemployment are secondary now that trade issues clearly top on the agenda at the White House and at the FOMC.

Investors should understand the true reasoning behind these decisions, whether they agree with them or not.

Jake Novak is a political and economic analyst at Jake Novak News and former CNBC TV producer. You can follow him on Twitter @jakejakeny.

For more insight from CNBC contributors, follow @CNBCopinion on Twitter.