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Let's See If Powell Stays 'Modestly Hawkish'

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Thursday, 01 March 2018 09:46 AM Current | Bio | Archive

The Wall Street Journal informs that the Trump administration has summoned steel and aluminum executives on short notice for a White House meeting today, telling them that an announcement could be made then on long-awaited curbs on steel and aluminum imports in the name of protecting national security.

Today’s meeting between the President and the manufacturing executives comes two weeks after the Commerce Department released the results of a study launched in April 2017 looking at whether steel and aluminum imports pose a threat to American defense.

According to people familiar with the matter, President Trump is planning a major announcement today about whether to make a major increase in taxes. Indications are that a 25 percent tax will be imposed on steel imports with a 10 percent tax imposed on aluminum imports, although, as ever, there is some uncertainty about the details.

The passing on of these taxes to U.S. retail consumers is likely less direct than with the previous tax increases on washing machines and solar panels in January this year. Related job losses are also likely less direct.

The taxes themselves are not particularly unexpected. The trend of trade protectionism is perhaps a little bit more troubling.

President Trump was suggesting all available tools will be used against China in the trade report to Congress that was just released. 

The report “2018 Trade Policy Agenda and 2017 Annual Report of the President of the United States”: “Under President Trump’s leadership, we will use all available tools to discourage China – or any country that emulates its policies – from undermining true market competition.”

The structure of the U.S. economy has been built on the idea of the United States being part of a global economy.

  • Trade isolationism changes the assumptions of companies and investors.
  • Trade protectionism remains one of the key risks, at least in my opinion, to the world economy and market outlook this year.

In the meantime, today we’ll get Personal Income and Personal Spending data, along with the Personal Consumer Expenditure (PCE) deflator.

The effects of the personal income tax cuts will not be evident in this data and it seems relatively unlikely that the effects of the tax cuts would have been anticipated in the January spending figures. Those effects are more likely to emerge in the coming months.

The Core Personal Consumption Expenditure Price (PCE) Index, which excludes food and energy, went up 0.2 percent month-over-month in December of 2017, following a 0.1 percent gain in November and is the Fed’s favored inflation measure that until January performed around 1.5 percent on the year. By the way, the PCE has missed the Fed's 2 percent target since mid-2012..

Looking forward, estimates (!) forecast that the Core PCE Price Index could stand at 115.59 points within 12 months, which would represent an increase of about 1.4 percent from and 2017. In the long-term, the Core Personal Consumption Expenditure Price Index is projected to trend around 120.00 index points in 2020, which would represent an increase of about 5.3 percent, which seems a lot to me.

Anyway, we will have to wait and see what comes out.

As the Fed is more forward- than backward looking, the 4-rate hike scenario that is projected for this year is in part based on keeping inflation, CPI and PCE, broadly stable around current or somewhat higher levels given the trends in economic growth.

It’s also worth noting that the PCE deflator may be the Fed’s favored measure, but financial markets do tend to pay more attention to the Consumer Price Inflation (CPI) index that in January increased by 2.1 percent year-on-year, the same as in December and above market expectations of 1.9 percent. The CPI for all items less food and energy rose 1.8 percent over the past year.

Besides all that, this morning, Fed Chair Powell will testify before the Senate Banking Committee. It will be interesting to see if he will repeat in some way or another his “modestly hawkish” appearance in Congress on Tuesday when he made it clear that the Fed could raise interest rates more than the 3 times, based on the economy and inflation.

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

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The Wall Street Journal informs that the Trump administration has summoned steel and aluminum executives on short notice for a White House meeting today, telling them that an announcement could be made then on long-awaited curbs on steel and aluminum imports in the name of...
powell, fed, senate, economy
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2018-46-01
Thursday, 01 March 2018 09:46 AM
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