Well, as expected, the recent fed decision to cut in U.S. interest rates is causing some confusion — and press reports of what’s going don’t really help all that much. For example, Bloomberg says that Fed chair Jerome Powell “just learned the first rule of trade fight club: No one wins.”
Bloomberg noted that the Fed cut interest rates on Wednesday “despite an unemployment rate near the lowest level since the 1960s, a roaring stock market and an economy that President Donald Trump has called the best ever.”
Furthermore, in explaining the central bank’s first rate reduction in more than a decade, Powell cited the economic drag of U.S. trade policy uncertainty. Without naming names, he attributed the dimmer growth outlook to America’s tougher trade policy approach with its trading partners, Bloomberg said.
His reward “for juicing the punch bowl?” A Twitter shaming from the President and another request to “get with” the White House’s economic program which targets Chinese and European trade imbalances and wouldn’t mind a weaker dollar.
“What the Market wanted to hear from Jay Powell and the Federal Reserve was that this was the beginning of a lengthy and aggressive rate-cutting cycle which would keep pace with China, The European Union and other countries around the world,” the president tweeted Wednesday. “As usual, Powell let us down.”
However, Bloomberg thinks that “there’s more at stake here than the reputations of two of the world’s most powerful men. The growing view among Wall Street economists is that the Fed’s embrace of lower rates risks exacerbating a trade war now in its second year,” it said.
At the same time, Bloomberg noted that the President’s trade adviser Peter Navarro told the press this week that “tariffs are good" and “worked beautifully" with China as a protection against the country’s intellectual property theft, hacking and other unfair trade practices.
Still, Bloomberg argues that the Navarro view is not unanimous. It points to the “argument” that the Fed’s move will buoy financial markets and an economy weighed down by policy unpredictability that could empower the administration to “dial up” its clash with China—or perhaps start one with Europe — by allowing it to avoid the consequences of its “get tough” policy.
Citigroup economists Cesar Rojas and Catherine Mann last week wrote that “looser monetary policy amid robust growth, low inflation and high stock prices could indeed give the U.S. administration additional room for a more aggressive trade policy stance.” That wouldn’t be good, they said, as it “would prolong the uncertainty currently clouding the global economy.”
Bloomberg also said that “a less-dovish-than-anticipated Federal Reserve was always the biggest danger” and that markets voted accordingly after Chairman Powell’s Wednesday comments. It noted that “the rand led today’s retreat among currencies as the dollar headed toward a more than two-year high and stocks on the MSCI emerging-market index fell for an eighth day. It said that the sovereign bonds of Turkey, South Africa, Russia and Brazil were among the biggest casualties in the fixed-income world.
The logic from here, Bloomberg thinks, is that emerging-market central banks will be further emboldened to follow in the Fed’s footsteps and keep cutting rates without worrying too much about eroding the relative allure of their own markets. As Angus Bell, who helps oversee $45 billion of developing-nation debt at Goldman Sachs Asset Management, told Bloomberg in Singapore yesterday, the “shackles are off for central banks. Local rates in the emerging markets are the place to be,” he says.
So, we will see. Trade policy is an increasingly sensitive area of debate especially as the next political season approaches — and it will certainly involve producer groups, the Congress and many others. This is a discussion producers should watch closely as it emerges, Washington Insider believes.
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