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The Federal Reserve's quick turn to easier policy began with Trump's tweet on trade



Federal Reserve Chairman Jerome Powell held a press conference after a two-day policy meeting of the Federal Open Market Committee in Washington, DC, January 30, 2019.

Leah Millis | Reuters

The road to the official policy of the Fed this week to cut interest rates began in early May with a chirping.

President Donald Trump has published on May 5 that he can hit China with new tariffs and that China is trying to renegotiate. This sudden escalation of the trade war surprised the markets and business leaders who eagerly await a negotiated deal between the White House and China that will put an end to the trade conflict and cancel the tariffs rather than increase them

Four days after the Fed's May, where he maintained stable rates, confirming that he was still suspended in his policy to raise interest rates. In fact, Fed Chairman Jerome Powell said that on that day weak inflation is perceived as a transition from the Federal Reserve, which in fact implies that this is not enough to reduce interest rates.

soften, tensions in trade escalate, the Chinese economy continues to be weak, and inflation remains below its nominal value. Now the Federal Reserve has officially signaled that it is ready and ready to cut interest rates.

"The only thing that has really changed is the shot taken around the world this Sunday afternoon when Trump threatened to raise tariffs from 1

0% to 25% in the second tranche of Chinese imports. the ball to cut interest rates for a while, and it really went too fast after Trump's trade war against China, "said Chris Rupke, Chief Financial Officer at MUFG Union Bank

" Chronicle of Chirality "

Grant Thornton Swank said that other factors contributing to e in the tone, is the threat of Trump to set tariffs for all the Mexican goods he has dropped off, and the fact that the world economy is not recovering as expected, despite the stimulus that the Chinese economy continues to be weak

. we live in a world where politics can change in the speed of a tweet, and you can get the order of politics in the speed of a tweed. The ability of the president to unilaterally raise tariffs in so many areas is something Congress is concerned even has not done anything yet. This increases the risk of a global slowdown, "Swann said.

Fed officials have opened the door for interest cuts by the beginning of June, saying they will take action to prolong economic expansion if necessary, and they followed after Wednesday's meeting that a interest rate cut could occur in July

"Only seven weeks ago we had a great job report and we came out of the last FOMC meeting, feeling that the economy and our policy are in a good place. We want to see and want to respond to developments and trends that are sustainable, that they are real and do not just react to data points or simply to mood changes that may be unstable, "Powell told reporters after the Fed meeting in Wednesday

Powell said trade is an important driver of moods. "In fact, this is also global growth, which is our opinion, so we are not focused exclusively on an event or piece of data," he said at the briefing.

The Fed's environment left interest rates unchanged, but his statement, Powell's forecasts and comments signaled that the Fed is willing to cut interest rates if needed to help the economy and fight the effects of trade wars, low inflation and global delays. Seven Fed officials predicted a half-percent interest rate cut in this year's forecast, and Powell, in his comments, stressed that others leaned in that direction.

I think that's what Powell told us. You can see how trade has affected the US economy. Fixed investment costs are about a third of what was before the war, "said Ward McCarthy, Chief Financial Officer at Jefferies.

McCarthy said that in the six quarters ended in Q2, 2018, core business investment grew by an average of 6 percent quarterly.

"Since then, it has grown by a little over 1% and seems to be slowing down, and this is directly linked to trade tensions, and that's the main economic factor the Fed worries about," McCarthy said. Many economists now expect the Federal Reserve to raise interest rates to 50 basis points on July's meeting, and some expect even if the president can reach a compromise on a trade deal when he meets with Chinese President Ji Sinpin at the G-20th meeting on June 29. Trump threatened to introduce $ 300bn in Chinese commodities if this meeting does not go well.

"If he can consider a meaningful trade deal with China, the adverse effects we see on fixed investment costs, the adverse effects we see on business confidence will turn, and that should eliminate the need for Fed action." McCarthy said. "There is some irony here, Trump fought against the Fed to get lower prices, but that would be because he did not manage to trade."

The Fed and in particular Powell were criticized by the president for no interest rate cuts. Trump explores Powell's demotivation, but Powell stressed on Wednesday that the law is clear and he intends to endure the remainder of his four-year term.

Powell also said that when the last FOMC ended its session on May 1, there was preliminary evidence that some of the negative cross-currents in the economy have slowed.

"The latest China and Europe data was encouraging, and there were reports of progress in trade talks with China." Our standing patience seemed appropriate, and the commission did not see any strong ground for adjusting our policy, "the Fed chairman said on Wednesday . 19659002] Immediately before the start of May, the S & P 500 reached its highest level on Friday, following a report that the economy has added 263,000 jobs in April.

This report has been revised a little less, but it is followed by May's gloomy no-pay salary of just 75,000, a delay that many economists have blamed for trade wars. The S & P 500 yesterday surpassed this record on May 3, after the market collapsed with expectations of interest rate cuts. Treasury yields also declined since then, with the 10-year low reaching 1.97% on Thursday, from a high of 2.5% on May 3.

"It is interesting to me that the Chinese trade war accelerated the yield cut, but if there is an agreement with China, the Federal Reserve has really turned into a corner where it has to deliver what the market wants," he said. Rupkey. "If the G20 goes well, the Federal Reserve will call it a reduction in the insurance rate, anyway."

Data similar to recession?

Rick Ryder, BlackRock CIO of Global Fixed Income, said on CNBC on Thursday that he expects a 50 basis point cut in the pound, relying on the potential for some upcoming data to look like a recession after a slowdown in production activity . He said the Fed is expected to be the second year after the Federal Reserve withdrew from the hiking regime in January. The Federal Reserve has lowered its value to neutral, the latest interest rate hike in December, and the booming market.

[Wednesday’s] The policy changes from the Federal Reserve to a large extent corresponded to market expectations and began a transition to the third stage of the three-part cycle for 2019. The year started at a higher pace after the FOMC in December, but this move soon (and dramatically) ended in January, in what we have long argued will be a very reasonable change in the political direction as the Federal Reserve pause of their cycle of tourism, "writes Rider.

"… the cycle of rates has clearly entered a new phase of lighter policy, along with a clear global economic weakness, some mitigation in the US, some increased trade / political uncertainties and inflationary dynamics that is not approaching to the federal target of 2%, and in fact, with some measures, it has recently moved away from it, "Rider notes


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