Trade tension-related headlines involving Mexico and China in May and early June prompted Fed Chair Powell to move closer toward embracing a potential rate cut to “sustain the expansion.” With the resolution of friction with Mexico, and with trade negotiations resuming with China, questions abound as to whether the FOMC will find unequivocal support for a July rate cut, as well as two more the market is pricing in by the end of 2019.
As talks continue, uncertainty tied to corporate spending and hiring could be alleviated somewhat, but the on-again, off-again negotiation pattern so far may keep companies careful about increasing their budgets. The president said that there will be no additional tariffs placed on Chinese goods for the “time being.” In addition, the announcement didn’t mention deadlines, which helps remove the nervous urgency so associated with previous countdowns. Given the far-reaching fundamental differences between the two sides, negotiations could continue for months, if not longer.
Chairman Powell heads to Capitol Hill on July 10 to give testimony on his semi-annual assessment of the economy and monetary policy, and market participants will look for indications as to his current view on interest rate policy as affected by the resumption of trade talks.
The Economic Backdrop—Crosscurrents Persist
No doubt the difficulty facing the Fed is how much of the broadening economic slowdown is due to concerns over a trade war, or a general deceleration of economic activity that is only partially related to trade. And does the Fed, not to mention the economy, enjoy the luxury of waiting to see how the data unfold now that a truce has essentially been declared? The economic landscape is as the Fed chair described, one of crosscurrents:
• Interest rates have moved steadily lower since their mid-November high, which should help the housing market in terms of home purchases and mortgage refinancing.
• Auto sales should also see a boost, but a strong labor market, with solid wage growth, needs to be in place to underpin consumer confidence.
• The U.S. consumer maintained a steady pace of spending as household savings remain stable, and consumer debt and consumer interest payments remain manageable; however, bank consumer lending standards are inching higher.
• The reduction in rates is positive for companies as well, as it helps to manage their debt levels.
• Small business owners continue to register confidence, although higher labor costs and difficulty in finding qualified workers remain a concern.