Archives for July 2019

There is less and less evidence to support the rationale for the earlier rounds of interest rate increases: that the economy was at risk of overheating and so higher rates were needed to forestall inflation. The unemployment rate has been at or below 4 percent for nearly a year and a half, yet prices continue rising more slowly than the 2 percent the Fed aims for. And if anything, growth in workers’ wages — the channel by which a tight labor market is expected to fuel inflation — has leveled out in recent months rather than accelerated.

It is becoming more clear than ever that we should not expect interest rates in the United States to return to their pre-2008 norms anytime soon. Consider that 30-year Treasury bonds are yielding only around 2.5 percent — implying that global investors with trillions of dollars on the line do not anticipate a quick end to the era of low rates.

So to make sense of what Mr. Powell and his colleagues did, don’t look for some particular data point that persuaded them interest rates were too high, or for an argument that slightly lower borrowing costs will unlock significantly more business investment or consumer spending.

Rather, think of it as a corrective action, aimed at undoing a mistake in 2018.

Unfortunately, that makes forecasting what the central bank will do next particularly tricky — and Mr. Powell’s news conference didn’t help matters.

He described the action as a “midcycle adjustment.” That fueled a stock market sell-off, as traders interpreted it to mean that there may not be the further rate cuts that have been reflected in asset prices.

Later, Mr. Powell added that he was not saying necessarily that this would be the only rate cut, only that it is not envisioned as the first in a long series of them.

This may be less of a communication failure and more of a genuine uncertainty within the Fed over whether to act again in light of solid economic data in recent weeks. Two Fed officials dissented from this week’s rate cut, so Mr. Powell could face a tricky task if he pushes for a further move later in the year.

Article source: https://www.nytimes.com/2019/07/31/upshot/why-fed-cut-rates.html?emc=rss&partner=rss

The Chinese-language People’s Daily, the flagship newspaper of the Chinese Communist Party, said in an editorial that American trade negotiators should “consult with sincerity” and not “make trouble out of nothing.”

Given the clash between the two sides, expectations for the meeting were low. Agathe Demarais, global forecasting director at The Economist Intelligence Unit, said in an email that the talks were “mainly aimed at rebuilding trust between the two sides” and that they “appear to have been successful on this front.”

Craig Allen, the president of the US-China Business Council, which represents American companies that do business in China, said he was also pleased that American negotiators had traveled to China and that the two sides had agreed to move forward with agricultural purchases.

Some American commentators were more critical.

“The US-China trade talks are failing American workers, and the latest statement from the White House confirms that,” Scott Paul, president of the Alliance for American Manufacturing, which represents manufacturers and their workers, wrote on Twitter. “A regurgitated pledge to buy more ag products and more talks in September? Trump would have ripped any Democrat for that outcome…”

But the gaps between the two sides have not been easy to bridge.

The issues remaining between the United States and China go beyond tariffs. The Trump administration is preparing to decide whether to grant dozens of special licenses to American companies to sell to Huawei, the Chinese telecommunications giant that Washington earlier this year put on a list that restricts its access to American technology. Though Huawei has increasingly developed its own technology, it relies on American chips and software to power a broad swath of its products.

Wilbur Ross, the United States secretary of commerce, told reporters during a visit to Brazil this week that a decision on those licenses was “forthcoming,” without giving details.

On Tuesday, Huawei announced an increase in sales for the first half of the year, indicating that the clampdown by the Trump administration has had little impact on the company so far. But the blacklisting is viewed by Beijing as a significant hurdle to a trade deal, and the limits could further hurt Huawei the longer they last.

Article source: https://www.nytimes.com/2019/07/31/business/economy/us-china-trade-talks.html?emc=rss&partner=rss

Mr. Powell said the committee viewed the move as a “mid-cycle adjustment to policy,” suggesting that the Fed sees this cut as more similar to two instances in the 1990s, during which the Fed moved rates down slightly to get the economy through periods of uncertainty, rather than the beginning of a rate-cutting campaign.

The Fed’s rate cut carries political risks, given Mr. Trump’s attacks on the central bank. Mr. Trump has been denouncing the Fed in speeches and on Twitter for the past year, criticizing its four 2018 rate increases and blaming its policies for slowing the American economy. Some onlookers may see Wednesday’s move as caving to the president.

The Fed operates independently of the White House. It attributed the change, which officials have been signaling for months and which investors fully expected, to growing economic concerns.

“We also don’t conduct monetary policy to prove our independence,” Mr. Powell said.

The central bank is trying to extend a record-long economic expansion, because officials believe that doing so will allow the Fed to achieve its goals of maximum employment and slow but steady inflation. The unemployment rate is hovering around its lowest level in 50 years, but that has yet to push wages dramatically higher in a way that forces companies to lift prices more quickly.

Inflation has run shy of the Fed’s 2 percent goal since the central bank formally adopted it in 2012. A little inflation helps to grease the wheels of a healthy economy, allowing businesses to raise wages faster and lifting interest rates, giving the central bank more room to cut in the event of a downturn.

Prices picked up just 1.6 percent in the year through June, not counting volatile food and fuel costs.

Wages are growing only moderately. An index of employment costs climbed by 2.7 percent in the second quarter from a year earlier, less than expected and a slowdown from earlier in 2019, according to data released on Wednesday.

Article source: https://www.nytimes.com/2019/07/31/business/economy/federal-reserve-interest-rate-cut.html?emc=rss&partner=rss

Finally, the Fed could use its statement to offer up a new plan for how it will deal with its massive bond holdings. Policymakers have been shrinking their balance sheet, which grew as the Fed bought government-backed securities to bolster the economy in and after the recession. That unwinding, which is probably slowing the economy slightly by driving some interest rates higher, is scheduled to end in September. It’s possible that officials would stop the process early, so their policy is uniformly pointed toward bolstering growth.

Those pesky prices

If you’re looking for a quiet signal about whether another cut is possible, pay attention to whether policymakers fixate on America’s inflation shortfall in their statement or if Mr. Powell does during his news conference. Officials have increasingly worried about stubbornly weak price gains, and while Mr. Powell has said he expects inflation to gradually rise, progress has been slow.

The Fed formally adopted a 2 percent goal in 2012, and has since failed to sustainably achieve it. The central bank’s preferred inflation gauge rose just 1.6 percent in the year through June. Charles L. Evans, the president of the Federal Reserve Bank of Chicago, said on July 16 that he would be comfortable with a “couple” of cuts this year “on the basis of inflation alone.”

“Even now, the best forward-looking measures of inflation are closer to one and a half” percent, Janet L. Yellen, the former Fed chair, said in Aspen, Colo., on Sunday. “And it looks like inflation expectations are slipping. And that’s dangerous, because inflation expectations play a role in the prices that firms actually set.”

Dangerous may seem like an extreme word — who doesn’t like low prices? — but inflation is grease on the wheels of a healthy economy. It gives companies a little headroom to raise wages, and it lifts interest rates, leaving the Fed with more room to cut them in a downturn.

What does it mean for my wallet?

Expectations of a rate cut have already invigorated markets, pushing the SP 500 stock index to new highs. What happens to stocks on Wednesday will largely hinge on future guidance: If the Fed signals that more easing might come, asset prices might soar. If it hints that it will be cautious when spiking the proverbial punch bowl, the response may be less ecstatic.

Likewise, mortgage rates have already fallen on anticipation of a rate cut. The Fed’s signaling could determine how they evolve. Credit card rates could decline over time, as well, but they are influenced by other factors — including credit scores — and do not track as directly with the Fed’s rate.

Article source: https://www.nytimes.com/2019/07/31/business/economy/fed-meeting-interest-rates.html?emc=rss&partner=rss

The more moderate Democrats were more cautious in their attacks on Mr. Trump’s stewardship of the economy, largely taking issue with sluggish income growth and what they called the unfairness of the tax code while criticizing his methods on trade.

John Hickenlooper, the former governor of Colorado, outlined a give-peace-a-chance approach with China, arguing that “trade wars are for losers” and that the dispute with China cannot be won with tariffs, which he described as a tax on the middle class.

“There is a way of looking at trade that is therapeutic,” Mr. Hickenlooper said.

Despite the strength of the economy, some economists argue that it has thrived in spite of Mr. Trump’s agenda. The trade tensions caused by his tariffs are widely acknowledged to have been a drag on economic growth. The federal budget deficit has increased an average of 15 percent for each fiscal year he has been in office.

Moreover, Mr. Trump’s handling of trade negotiations has called into question his deal-making prowess. The overhaul of Nafta is languishing in Congress, where it must be ratified. A new trade war with Europe is brewing over digital taxes. Negotiations with China, which resumed this week in Shanghai, appear to be making little progress.

Mr. Trump blames Democrats for many of his trade challenges. Ahead of the debate on Tuesday, the president said countries like China were rooting for one of his would-be successors to replace him so they could get better trade deals with someone else in the White House.

“I think if China had their wish, they’d wait until after the election, they’ll pray that Trump loses, and then they’ll make a deal with a stiff,” Mr. Trump said.

Article source: https://www.nytimes.com/2019/07/31/us/politics/democrats-debate-trade-china-economy.html?emc=rss&partner=rss