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Federal Reserve: Prevention against cure
A ceasefire has been called in the US-China trade war, but we doubt that the truce will last long as both parties remain distant from each other on key issues such as technology transfers, intellectual property rights and the trade dispute settlement mechanism.
A new round of tariff increases will aggravate economic weakness by disrupting supply chains, increasing costs and damaging profit margins. Such an environment would be negative for equity markets and make US companies more reluctant to invest and hire new workers.
Given the forecast of renewed trade tensions, we expect an anticipated rate cut of 25 basis points in July, followed by another 25 basis point increase in September.
At the June FOMC meeting, the central bank spoke of an increase in "uncertainties" about the economic outlook, which it will "watch closely". Federal Reserve Chairman Jerome Powell later repeated his comment: "Prevention is better than cure." Given the forecast of renewed trade tensions, we expect an anticipated exchange rate cut of 25 basis points in July, followed by another 25 basis points in September.
A 50bp rate cut in July had been considered at some point, but given that the St Louis Fed President, James Bullard, who was the only Fed official to have voted in favor of the money, he said he would not be able to do anything. a rate cut in June, had hinted unlikely. Nevertheless, the market is planning three total rate cuts this year, with a further 25 basis points cut in early 2020.
We do not expect such aggressive action, because we are convinced that President Trump wants to be re-elected and will therefore be ready to sign a trade agreement, probably in the fourth quarter, which will not necessarily meet all his initial demands. A rising stock market and a healthy economy give it the best chance of success.
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