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Fed Isn't Intimidated by Trump as 2 More Rate Hikes Loom

Fed Isn't Intimidated by Trump as 2 More Rate Hikes Loom
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Thursday, 23 August 2018 07:52 AM Current | Bio | Archive

Yesterday, we had the release of the minutes of the last Fed meeting.

There was no suggestion that the Fed will be offering the easy money that President Donald Trump appears to believe is desirable.

There was indeed a very clear signal of a September rate hike spelled out in the most direct of language.

The path of continued rate tightening generally has been signaled by the Fed and indeed the language of the minutes was consistent with the idea of another two rate hikes in the course of this year with the policy following the pattern of hike-pause, hike-pause cycle.

However, risks were also highlighted, including of course the ever-present threat of President Trump’s tax increases (tariffs) on U.S. consumers.

The minutes read: “All participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks. Participants observed that if a largescale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households. Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains.”

While early tax increases via tariffs will take some time to hit the consumer, the tax rise now may not be felt until early next year.

The threat of the trade tax increases, combined with the business uncertainty that they create, could conceivably give the Fed reason to pause at some point.

The Fed did acknowledge that the business unease about trade taxes has not yet translated into lower investment spending.

There was also a discussion about whether the yield curve matters as a signal for Fed policy. It almost certainly doesn’t signal anything about the economic cycle. In fact, it doesn’t in other economies so why should it in the U.S.

The minutes read: “An inversion of the yield curve might not have the significance that the historical record would suggest; the signal to be taken from the yield curve needed to be considered in the context of other economic and financial indicators.”

The structural changes of the U.S. economy is something to look for tomorrow at the annual gathering of central bank leaders at the Jackson Hole symposium in Wyoming where Federal Reserve Chair Jay Powell is scheduled to speak.

Investors have been distracted of late given the implosion of the Turkish lira, pressures on emerging markets, U.S. sanctions, ongoing trade tensions, a presidential broadside at the Fed for raising rates and the rising stakes of November’s midterm elections.

But for Mr. Powell, not much has changed. The U.S. economy remains well placed. The Atlanta Fed estimates real GDP growth is running at 4.3 percent in Q3, wage pressures are rising, inflation is on target and unemployment is below 4 percent. Add to that a new record level for the S&P 500, plus a further injection of fiscal stimulus in the second half, and Mr. Powell would argue that conditions justify the further tightening of policy at a steady clip. Maybe, Mr. Powell could signal a level of cautious optimism in Jackson Hole.

PMIs for the Eurozone and the U.S. plus jobless claims

The data calendar today contains assorted purchasing managers indices (PMI), which are of course opinion polls (surveys) that reflect sentiment of the business community.

This morning we already got the IHS Markit Flash Eurozone Composite PMI that indicated that the eurozone economy continued to grow in August, albeit with the rate of expansion remaining one of the weakest seen over the past year-and-a-half.

Escalating political worries, rising prices and a recent slowdown in order book growth have all contributed to the gloomiest outlook for almost two years, according to companies’ expectations of their future output. In manufacturing, optimism is down to its lowest for almost three years, as a near stalling of exports corroborated escalating trade war worries.

Warning lights are flashing. Analysis of past data indicates that demand needs to pick up to sustain current output and employment growth in coming months. Yet the risks seem tilted to the downside.

At 8:30 am EDT, the U.S. Department of Labor will release the jobless claims that are expected to come in at 215,000 in the August 4 week vs 212,000 in the prior week. All readings in this report are at or near historic lows and consistent with strong demand for labor. At 9:45 am EDT, we’ll get the IHS Markit Flash US Composite PMI.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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There was no suggestion that the Fed will be offering the easy money that President Donald Trump appears to believe is desirable.
fed, minutes, investors, rates, economy
Thursday, 23 August 2018 07:52 AM
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