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Investors, Not Economists, Got Excited Over Powell's Speech


Thursday, 29 November 2018 11:16 AM Current | Bio | Archive

Fed’s Powell: What Did He Actually Say?

Federal Reserve Chairman Jerome Powell changed his language “slightly” and got the markets very excited. However, in my opinion, it’s not enough to get economists very excited.

The part that has caused investors to go wild, or let’s say relatively wild, was when Powell said: “Interest rates are still low by historical standards, and they remain just below the broad range of estimates of the level that would be neutral for the economy--that is, neither speeding up nor slowing down growth. My FOMC colleagues and I, as well as many private-sector economists, are forecasting continued solid growth, low unemployment, and inflation near 2 percent.”

The excitement came from the “just below” bit, which some would seem to be taking as meaning “the end of tightening is just around the corner.”

In fact, this wording was exactly what the Fed’s own projections have been suggesting all year.

The Fed is still on course to raise rates in December, and it is still on course to raise rates again in 2019. Next year could well see some sort of pause in the Fed’s policy tightening path and there is uncertainty about that because of the uncertainty surrounding the fiscal tightening caused by the tariff trade increases as well as some of the consideration for what will happen to the Fed’s balance sheet.

But markets should certainly not assume that a “one-and-done” could be on the cards of the Fed’s policy position.  Powell’s comments were indeed very far from that.

U.S.-China Trade

Meanwhile the threat of U.S. tariffs or tax increases on car imports has been reiterated yesterday by U.S. Trade Representative Robert Lighthizer when he complained in a statement that China slaps 40 percent tariffs on U.S. auto imports, which is more than the 15 percent tariffs it imposes on other countries and the 27.5 percent tax the U.S. imposes on Chinese auto imports. Lighthizer said the president had directed him to “examine all available tools to equalize the tariffs applied to automobiles.”

President Donald Trump was rather clear about the possibility of raising taxes on car imports when he tweeted: “The reason that the small truck business in the U.S. is such a go to favorite is that, for many years, Tariffs of 25 percent have been put on small trucks coming into our country. It is called the “chicken tax.” If we did that with cars coming in, many more cars would be built here.....”

The thread that was implied in the tweet didn’t suggest “all” cars coming in, but it’s clear that this raised concerns for the European car builders like Mercedes, Volkswagen, etc.

Now, companies can and do find ways around these tariffs. For example, assembling cars in Thailand to export to China.

Nonetheless, the more tariffs or taxes are raised, the harder they will become to evade.

In the meantime, the South China Morning Post reported the meeting on Saturday in Buenos Aires over dinner between Trump and his Chinese counterpart Xi Jinping is likely to end without a joint statement or joint press conference, regardless of whether they achieve a breakthrough.

According to a source who was briefed on the preparations and declined to be identified, "the lack of a formal joint readout of the meeting’s results is designed to offer both the U.S. and China the leeway to handle the outcome from the meeting as each sees fit," the South China Morning Post reported.

It is widely expected that any form of agreement between Trump and Xi will, at best, be a general framework instead of a specific action plan.

At the same time it could be interesting to take note of the fact that the Trump-Xi summit remains shrouded in secrecy despite its importance.

It remains unknown how long it will last, which advisers will join the leaders at the table and what specific items will be on the agenda.

As always, we’ll have to wait and see what happens.

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

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Markets should certainly not assume that a “one-and-done” could be on the cards of the Fed’s policy position.  Powell’s comments were indeed very far from that.
investors, economists, fed, powell, speech
Thursday, 29 November 2018 11:16 AM
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