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(Bloomberg) – Federal Reserve Chairman Jerome Powell will not be short of material to choose from when he will kick off the annual Central Bank symposium at Jackson Hole on Friday with a speech on challenges of monetary policy.
A shock of deglobalization triggered by the commercial policy of Donald Trump; extremely low interest rate, including $ 16.7 trillion of negative return bonds; an endless presidential assault on the Fed; and a growing risk of recession in the United States and around the world.
"There are all kinds of risks," said former chief economist of the International Monetary Fund, Maury Obstfeld, currently principal investigator at the Peterson Institute of International Economics.
And some of them, including the risk of a tough Brexit and political protests in Hong Kong, lie outside the United States and are not sensitive to the influence of the Fed.
Fed observers are expecting Powell to do nothing Friday to discourage investors from the widespread perception that the central bank will cut interest rates next month. But we do not know if it will open the door to a reduction of half a percentage point, which some traders are looking for.
"It's definitely a possibility," said Bruce Kasman, chief economist at JPMorgan Chase & Co., to cut his rates by half a point in September. "But I do not see it. The data do not justify that. "
It assesses the chances of a US recession of 40% to 45% over the next 12 months.
Mixed signals
Former Fed chief Nathan Sheets compared the economic dash in front of Powell to a Christmas tree. Some lights, like the sharp drop in bond yields, are blinking red recession. Others, like solid retail sales, will flash in light green or, at worst, yellow in warning.
Powell described the Fed's policy as a "mid-cycle adjustment" on July 31 after cutting rates for the first time in a decade. Sheila Sheets, who still sees one or two rate cuts, said he would get along well with Powell, but he doubted the investors would do it.
The Fed chairman, however, will want to avoid feeding pessimism into the financial markets and see it spread more widely, said Sheets, who is now chief economist for PGIM Fixed Income.
Nothing to fear
"We have nothing to fear from a recession right now, other than the fear of a recession," Bank of America Corp. chief executive Brian Moynihan told Bloomberg on August 16. Television.
The Fed is in a "lost-lose" situation, said Mohamed El-Erian, chief economic advisor of Allianz SE.
If it lowers rates while the national economy is doing well, it will be accused of giving in to pressure from Trump and Wall Street. If this holds, it may cause a disruption in the financial markets that could hurt the economy.
In addition, investors are increasingly questioning the ability of central banks to stimulate their economies after a decade of inclusive, inclusive growth in which monetary policy makers have played a key role, El said. -Erian.
"What's happening in the global economy goes well beyond the Fed, far beyond trade," said El-Erian, Bloomberg Opinion columnist. "All this is part of a much deeper discomfort."
It is the shock of globalization that is holding the attention of the markets – and the Fed. As Powell himself noted, the problem is that the central bank does not have much experience in managing global trade tensions.
"This is a problem we have never faced before and we are learning by doing," he told reporters last month.
Tariff impact
Although the direct effects of tariffs are not significant, what matters is the impact of policies on business confidence and financial markets, he said.
And they can change quickly in response to Trump's last tweet.
Obstfeld compared today's situation to 1971, when then President Richard Nixon imposed a 10% surtax on all dutiable imports in order to force other countries to revalue their currencies. At the same time, Nixon was putting pressure on the Fed so that it could easily keep some money to help bid for the 1972 reelection.
These movements paved the way for the collapse of the Bretton Woods monetary system.
Now, "we are witnessing a break in the global trading regime," said Obstfeld.
Risk of contagion
In recent decades, recessions have generally started in the United States and spread to the rest of the world. The danger today is that the opposite can happen.
"It's kind of unique," said Kasman of JPMorgan. "The risk is that the rest of the world is sufficiently weakened, stressed enough to spread in the United States"
China has reported the weakest growth in industrial production since 2002, while the German economy shrank from falling exports. Brexit is an imminent risk since British Prime Minister Boris Johnson is committed to pulling the United Kingdom out of the European Union on October 31st.
What our economists say
Powell will probably focus on the divergence of monetary policy trajectories from one country to another and its implications for capital markets. However, his speech will be scrutinized to determine whether policy makers are reconsidering their decision to reduce insurance rates in a full cycle of easing. –Yelena Shulyatyeva and Eliza Winger Click here for the full report
The US economy is relatively autonomous: exports totaled 12% of gross domestic product last year. But US financial markets are more exposed. US companies in the S & P 500 Index account for more than 40% of their sales outside the country.
Many of the largest investors in the US public debt market are resident abroad. And they inject money into Treasury securities to take advantage of consistently positive returns.
"The whole question of the extent of external risk and its importance to the United States is at the heart of current political debates," said Lewis Alexander, chief US economist at Nomura Securities International.
This is one of the main ones at Jackson Hole.
– With the help of Vince Golle and Matthew Boesler.
To contact the reporter about this story: Rich Miller in Washington at [email protected]
To contact the editors responsible for this story: Alister Bull at [email protected] and Margaret Collins at [email protected]
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