As a presidential tweet ended a stock market rally and instilled new doubt into the prospects for a U.S.-China trade deal, one prominent economist remained optimistic.

While he held out the likelihood that Friday’s deadline for trade negotiations would pass without a deal, Raghuram Rajan, Chicago Booth Katherine Dusak Miller Distinguished Service Professor of Finance, also said that both the U.S. and China needed to create a stable, long-term agreement.

“I want to say that it will be a month,” said Rajan in The Global Outlook: Opportunities and Risks, a general session last week at the Investment and Wealth Institute’s 2019 Annual Conference Experience in Las Vegas. “If we don’t get a trade deal in a month, then the differences will become much larger – and maybe we won’t get a deal at all.”

Rajan explained that both the U.S. and China have arrived at a policy stance where they’re more likely to push each other for better trade terms because they have undergone  efforts to shore up their economies.

In the U.S., the 2017 tax reform reduced personal and business taxes on millions of Americans, adding stimulus to what was already one of the longest-running recoveries in modern history. The stimulus allowed the Federal Reserve to proceed along a path of interest rate increases through the first part of 2018.

“The Chinese were also well on the way to restructuring their economy, which they thought was too dependent on investments, exports and easy credit,” said Rajan. “They kept ‘flooding the fields’ over so many years, and that creates problems down the line – so they said ‘let’s try to fix this and go to a more stable structure, less dependent on investments and exports for growth, and more dependent on domestic consumption.”

The moves gave each country plenty of economic ammunition with which to wage a trade war.

Last year, amid a sea of good economic and earnings news, trade tensions ratcheted up as the president pulled out of proposed agreements, like the Trans-Pacific Partnership, and criticized already existing agreements, like the North American Free Trade Agreement (NAFTA).

The U.S. began applying tariffs on four different types of imports from China. “What happened to imports in each of these goods, thee was initially a little bump up as folks anticipated that tariffs would be levied, and then a serious decline in the imports,” said Rajan. “U.S. imports from China started declining. That doesn’t mean that U.S. imports decreased in aggregate, but imports started falling from China.”

The dueling tariffs and trade changes only served to increase monetary policy uncertainty, said Rajan.

Because of the interconnected global supply chain, uncertainty spread from businesses in  the U.S. and China to those elsewhere in Asia, Europe and the Americas.

“The globe is connected through supply chains,” said Rajan. “If you start boosting tariffs on goods from China, it disrupts the supply chain. That means your exports are also to some extent affected. Even as China’s exports plummeted, the U.S.’s exports also fell, as did Europe’s exports.”

In response, a new wave of volatility has impacted global financial markets, only punctuated by moments where market participants feel confident that some sort of trade agreement is in the works.

The Federal Reserve, once eager to proceed down a path of steady interest rate increases to get ahead of inflation and the next recession, has also changed course.

“As a result, we have had policy reversals: The Fed went 180 degrees from saying it was going to raise rates and that it was not concerned about volatility, from taking away the Fed put, this idea that the Fed would always intervene when the market falls,” said Rajan. “Everything came back on the table. They said ‘we’re not going to raise rates, we’re going to be careful about the state of the economy, maybe it’s not as robust as we thought.’”

The Fed also signaled that it will slow or pause the shrinking of its balance sheet, said Rajan, easing down quantitative tightening and the sale of bonds, essentially signaling monetary support for asset prices.

Overseas, the Chinese were also providing some fiscal and monetary stimulus for their economy, said Rajan.

While financial markets responded positively to the stimulus, trade questions remained. Market participants were operating under the assumption that a deal was forthcoming until the first week in May, when a series of social media posts from U.S. President Donald Trump put the negotiations in doubt. Rajan said that the tweets were probably an attempt to force China’s hand in the trade negotiations.

“The Chinese have backed off in recent weeks,” said Rajan. “The U.S. said ‘if you’re going to back off, we’re going to apply the tariffs we have not yet applied.’ There is some language back and forth – and at least now the Chinese delegation seems to be coming to Washijngton D.C. to deal. It seems like some deal will in fact be done – whether that deal satisfies, whether it’s stable or long-term, and whether it happens soon – all of these are questions that remain to be answered. What we need is a stable, long-term deal to quiet markets and to give them confidence.”

While the uncertainty on trade vexes the market, otherwise the global economy looks healthy in the near term, said Rajan. The U.S. is likely to be the world’s fastest growing industrial economy, and with a more dovish monetary policy, international and emerging market assets are likely to perform well.

“For the foreseeable future, it seems as if we’ve bought more time in the recovery,” said Rajan. “The good news is largely in the short term, over the medium term serious problems remain.”

One of the problems most vexing Rajan is political populism. Especially during a time of economic plenty.

At 3.6 percent, unemployment is at a decades-low in the U.S., and remains low across much of Europe and Japan.

“Why are people so unhappy? Why put faith in unorthodox leaders?” asked Rajan. “The question that keeps rising – is capitalism under thret? We have so many proposals from the Democratic left for changes in taxation, arguments for universal healthcare, medicare for all is making waves across  the U.S. Why all of this now, in the midst of plenty, when it seems like capitalism is really producing?”

Rajan argues that power and resources are concentrating in the government and in the market at the expense of communities.

Modern free, capitalist and democratic countries are supported by three pillars: The state, the markets and communities.

“Our standard view of capitalism is largely about free and competitive markets, with government included to enforce contracts and property rights,” said Rajan. “What this ignores, this view of capitalism between the markets and the government, is in a sense the tribe and the community, which work directly through the government to make capitalism work.”

Typically, the state provides justice and security – but in modern times, it does more, said Rajan, like offer education and post-market support to those who have fallen out of the economy, such as the unemployed and disabled.

Markets allow for creative productivity and choice, said Rajan. By community, he means proximate community like one’s neighborhood, village or municipality.

“I would argue the proximate community still matters, it’s an important source of your identity and values,” he said. “Community affects how well you do in life. A lot of success is not based on your parents, but depends on the people around you. Communities are also important for political organization – that’s where movements start. “

In a healthy capitalist economy, communities help to keep the state and the markets from accumulating too much power.

American history provides one such example of this happening: the progressive movement of the late 19th and early 20th centuries grew as a response to the growing power of railroads and banks and their grip on gilded age governments – many presidential administrations of that era are considered among the most corrupt in Ammerican history. Out of the progressive movement came the Sherman Anti-Trust Act, the Food and Drug Administration and the Federal Reserve.

“We fear too much concentration of power, therefore we want to break it up,” said Rajan. “We need to think of more effective ways of reducing the power of large organizations.”

By empowering communities, Rajan believes that countries can find more useful channels for policy – communities are better at understanding their own needs and can be more effective mechanisms of executing policy and enforcing rules.

For example, communities should have the resources and flexibility to set their own education policy. In some locales, free education need only continue through the high school years. In others where more technical or white collar jobs need to be filled, free four-year college tuition might make sense. In others still, where there might be a need for skilled labor or manufacturing workers, vocational training might be provided using the resources of the community or the state.

“A number of states have already made community college free,” said Rajan. “It should be decentralized. You don’t want everybody in college when, in fact, you could benefit more from having a higher level of vocational training. The point is that we have to be very practical.”