Jerome Powell, chairman of the U.S. Federal Reserve, speaks during the Monetary Policy Strategy, Tools, and Communication Practices Conference in Chicago, Illinois, U.S., on Tuesday, June 4, 2019. The conference includes overviews by academic experts of themes that are central to the Federal Open Market Committee FOMC 2019 review. Photographer: Taylor Glascock
2019 Finance LP
The U.S. economy has just completed its longest expansion in modern history. The unemployment rate is hovering at a 50-year low. So why is Wall Street suddenly freaking out about the possibility of a recession?
Markets are getting so nervous about another downturn that they have has begun to price in several cuts in official interest rates from the Federal Reserve. For perspective, as recently as the fall of 2018, investors were predicting as many as four interest rate increases.
The swing in sentiment been nauseatingly abrupt, and it reached fever pitch last week.
“The move in policy expectations on Friday was akin to moves seen only during the financial crisis,” wrote Roberto Perli of Cornerstone Macro, a former Fed economist, in a research note. “The market also brought down significantly its outlook for U.S. growth.”
US rate cut expectations have jumped sharply in recent weeks
The catalyst was the surprise announcement from Donald Trump that the United States would be imposing new tariffs on Mexico unless it shuts down its northern border.
This happened just as the United States, Mexico and Canada are in the process of ratifying a hard-fought renegotiation of the North-America Trade Agreement, itself forced by Trump’s intransigence with American trading partners.
After all, if Trump is treating Mexico this way with a deal already in hand, what are the chances of a reliable deal with the other key global player in trade, China?
It’s no wonder Fed officials, whose own forecasts also hinted at further tightening this year, now appear themselves to be actively considering a fresh round of interest rate reductions, albeit cautiously.
At a high profile Chicago Fed conference, Powell stopped short of endorsing future monetary easing. But he also made clear it is not outside the realm of possibility, especially if Trump’s trade war deepens—as it appears to be doing.
“We do not know how or when these issues will be resolved,” he said. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective.”
That one sentence sent a battered Dow Jones industrial average up more than 500 points on Monday, though the gains appeared fleeting.
“The sharp escalation in US-China tensions has clouded the global economic outlook and is contributing to a slowing pace of economic activity in a number of economies, including the US and China,” said Elena Duggar, associate managing director at Moody’s, in a statement.
“In the event that trade tensions with China escalate into further rounds of tariffs, we would expect the Fed to cut rates by 25 to 50 basis points in order to support the economy.”
Source: agen poker online