Fed chief should focus on trade-driven policy change

WASHINGTON (Reuters) – In its 105-year history, the US Federal Reserve has changed its monetary policy in response to property casualties, war, financial bubbles, and the political decision-makers' instinct direction the economy takes.

But the US central bank is currently preparing its first policy change triggered by tweets, while Fed officials are attacking the situation change on May 30 when US President Donald Trump threatened Twitter to impose new import tariffs in Mexico s' he did not do it. agree to curb the flow of migrants across the US-Mexico border.

The US economy changed little in the days that followed. But Trump's statements have scared the financial markets so decisively and threats to the global economy have become so palpable, that a reduction in interest rates of at least 25 Basis points were set for the Fed's July 30-31 policy meeting, a message from the Fed's president, Jerome Powell is expected to strengthen during his appearance before a congressional committee on Wednesday.

"The Fed has never disappointed a market with such expectations of action," wrote Joseph Lavorgna, chief economist for the Americas at Natixis.

While investors in contracts tied to the Fed's overnight targeted rate of interest established a probability of rate cuts close to 100%, "it would be unprecedented for the Fed not to reduce," Lavorgna wrote.

Powell is scheduled to appear before the US House of Representatives Financial Services Committee at 10:00 am EDT (14:00 GMT) as part of his semiannual Congressional monetary policy briefing.

Four hours later, the Fed should publish the minutes of its last political meeting, during which officials have turned to a rate reduction this month.

The minutes should show how much the central bank's thinking has evolved in the days following Trump's tariff threat in Mexico, and how the discussion has been shaped by other concerns, including low inflation.

Powell will return to Congress on Thursday to testify before the Senate Banking Committee.

Although US economic growth remains largely on track and the June employment report indicates strong hiring, the events of May have changed US trade policy as a secondary concern of the Fed. a central concern.

Previous US tariff series on trading partners, including China, had been ruled out on the grounds that their macroeconomic importance was minimal, with the Fed still forecasting early May that its key rate would remain unchanged at a range of 2.25% to 2, 50% for the rest of the year.

In contrast, the higher tariffs announced against China in early May, a growing sentiment that the world's two largest economies may not be able to reach an agreement, and the tariff threat against Mexico have added to the Growing sense that protectionism and higher tariffs were here to stay – at a cost of investment and growth.

"GUARD LINE"

The argument for reducing borrowing costs has not been fully decided. Reducing rates at this stage would be similar to the Fed's efforts in the mid-1990s to manage a long recovery rather than react to an imminent slowdown, and "there is no need to move immediately," the Philadelphia Fed President Patrick Harker.

But Trump's tweets about Mexico have had a particularly troubling impact, sparking enough volatility and doubts about the future, prompting the Fed to apply the rate cuts that Trump has demanded for other reasons.

While Trump was linking threatening tariffs, which would have touched one of the most integrated supply chains in the world, with uneconomic immigration requirements, investors were able to reduce by as much as 25 % federal funds rate expected for the end of the month. 2019.

This added an additional rate cut to that already discounted by investors and added market pressure to the growing list of Fed concerns.

At the Fed's last policy meeting in mid-June, eight of 17 policymakers said it was necessary to cut at least one rate by the end of the year. Powell told reporters that many others were inclining in that direction. The minutes can show how this bias has become.

In the Fed's monetary policy report released last week before Powell's testimony, the trade war was the subject of its own analysis, a sign of the attention it is drawing within the central bank.

Staff at the Fed concluded that rising global tariffs likely had a "material" impact on the slowdown in global trade last year and that "the uncertainty surrounding trade policy could cause companies to delay their investment decisions and to reduce their capital expenditures ".

Although the tariff threats on Mexico have never materialized and China and the United States have agreed to resume negotiations for a trade agreement, "this has hardly alleviated the uncertainty that, according to Fed officials, would help curb global trade and national investment plans, "The US economic team at Deutsche Bank wrote this week.

"We expect Powell to maintain a cautious line," they wrote.