Tags: trump | tariff | economic | risk

Fed Will Keep Hiking Rates Despite Risks From Trump Tariffs

roadsign of higher interest rates pointed to right and higher ahead against blue sky
(Paulus Rusyanto/Dreamstime)

Thursday, 25 October 2018 09:31 AM Current | Bio | Archive

The Fed’s Beige Book

The Federal Reserve’s Beige Book that more formally is called the Summary of Commentary on Current Economic Conditions in the United States was a ‘call’ to tighten monetary policy. Labor market tightness was described in quiet detailed terms. Rising prices were in evidence in a way that hasn’t been seen in 10 years.

The Fed would be "loco" to abandon its "hike-pause-hike-pause" cycle on this evidence.

This is no time for zero or negative "real" interest rates.

It’s interesting to take note that the just released IHS Markit Flash U.S. PMI factually confirms what the Fed’s Beige Book tells us.

Chris Williamson of IHS Markit commented: “The headline U.S. PMI is running at a level broadly consistent with the economy growing at an annualized rate of 2.5 percent, boding well for another robust quarter of growth. However, that U.S. growth is being constrained by a lack of capacity, with skill shortages widely reported and supplier delays remaining commonplace. Companies consequently reported another rise in backlogs of work as order book inflows once again exceeded output growth. The U.S. domestic economy remained the main driver of demand, with exports stagnating amid growing signs of trade being subdued by tariffs.”

So now, what about the evidence of the equity markets?

The recent drop in equity markets is on itself of limited direct economic importance. Barely half of all Americans own any equity and those that do, do not own very much.

Stronger employment and stronger wages outweigh any equity moves, but is the recent drop in equities telling us something about economics?

There may be something in that.

The Trump trade tariffs hurt "listed" companies far more than they hurt the wider economy, because most of the economy doesn’t really engage "directly" in international trade, but most "listed" companies do.

Now, it is noticeable that U.S. companies with high Chinese exposure have underperformed the overall equity market in the recent selloff.

This suggests that the underlying fundamentals remain firm and the Fed will keep raising rates. Trump’s tariff policy on trade remains as the Fed itself notes a ‘meaningful risk’ to the U.S. economy, but it is a more obvious risk to equity performance, at least for now.

ECB Policy Decision Today

Today it’s the European Central Bank (ECB) Governing Council's monetary policy decision day.

The excitement is somewhat lacking from this get-together because the long-term monetary policy part has been established.

We know that he ECB will be ending its bond buying program at the end of this year and that rates will not rise under President Draghi’s presidency and his term as President of the ECB expires on October 31, next year.

What financial markets will be looking for is what Mr. Draghi could comment at today’s press conference on the ‘Italian situation’. Besides that, perhaps also an intelligent intent to separate short-term noise of the Eurozone auto sector from the long-term trends of the Eurozone economy and what he could say about the Eurozone’s still temporary weakness, but that could worsen because of Italy’s non-compliance with the EU budget rules.

The risk is that Mr. Draghi’s addiction to easing will meet equity markets nervousness and an incorrect economic conclusion could then be drawn.

The Case of Killing of Saudi Journalist Khashoggi Continues

President Trump will be briefed today by his Central Intelligence Agency Director Gina Haspel (CIA) after her quick trip to Turkey as the crisis over the killing of Saudi journalist Khashoggi continues unabated.

Trump and his top advisers have repeatedly said the broader U.S.-Saudi relationship shouldn’t be ruptured over the killing of Khashoggi. The president has emphasized that arms sales to the kingdom shouldn’t be canceled, as he believes that would only push the country to look toward Russia and China.

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

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Trump’s tariff policy on trade remains as the Fed itself notes a ‘meaningful risk’ to the U.S. economy, but it is a more obvious risk to equity performance, at least for now.
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Thursday, 25 October 2018 09:31 AM
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