Kevin Hassett on Government Shutdown, China's Economic Leverage, and US Economic Growth

Government Shutdown Impact

• ⚠️ The government shutdown has entered another week, with Senate Democrats failing to pass legislation to reopen it.
• 📉 The marginal impact on the economy has been small so far, estimated at $15 billion per week, but a prolonged shutdown could significantly affect GDP and consumption.
• 🎯 President Trump is using the shutdown to cancel programs that Republicans never wanted, including a $20 billion project previously championed by Chuck Schumer.

Banking Sector and Credit Stress

• 🏦 Markets are showing nervousness due to credit stress fears in the regional banking sector, with issues at Zions and Western Alliance related to borrower fraud.
• 🚨 Hassett suggests the Biden administration was asleep at the wheel on banking regulation, citing the SVB crisis as an example.
• ✅ He expresses optimism that the current administration's team, including Mickey Bowman at the Fed and Scott Bessett at Treasury, will clean up the mess and stay ahead of any potential crises.

US-China Trade Tensions

• 🇨🇳 China's imposition of tighter export controls on rare earth minerals gives them significant leverage, controlling nearly 70% of the global supply.
• 🇺🇸 The Trump administration is responding with price floors and threatened 100% tariffs on Chinese goods, alongside blocking Chinese cooking oil imports.
• 🤝 Despite tensions, Hassett is confident in President Trump's ability to negotiate a favorable outcome with China, citing his past successes and the close relationship between Trump and Xi Jinping.
• ⏳ While rebuilding supply chains takes time, Hassett points to the team working on this project, including Peter Navarro, and expects significant progress in the next 1-3 years.

Federal Reserve and Economic Outlook

• 📊 The Fed is expected to implement three rate cuts of 25 basis points, a move Hassett views as a start, dependent on economic data.
• 💡 A positive supply shock from increased productivity due to artificial intelligence is expected to put downward pressure on prices, similar to the computer revolution in the 90s.
• 📈 Hassett forecasts the US economy is cruising around 4% growth, with no reason for it to slow down, and expects a significant reduction in the deficit by $600 billion.
• 🏠 Reduced deficits could lead to lower interest and mortgage rates, stimulating home building and contributing to economic booms.
• 👥 The job market shows strong gains for native-born workers, with Hispanic Americans leading job creation, countering fears that reduced immigration would be a negative shock.