Trump just took his trading battle on a new front – and now traders are safer than ever as the Fed will cut rates

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• President Donald Trump threatened Thursday to impose tariffs of up to 25% on goods entering the United States from Mexico until the "the problem of illegal immigration is solved. "
• The Fed's expectations for rate cuts have been the subject of newThe raders now see a 50% probability that the Fed will lower its rates in July.
• The average time between the last rate hike and the first rate cut is seven months – we are currently at five months.
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President Donald Trump has embarked on a new trade front Thursday threatening to impose tariffs of up to 25% on goods from Mexico and entering the United States until the end of the war. "That the problem of illegal immigration be solved".

The announcement shocked the financial markets, adding downward pressure on global markets it had already been exciting because of the recent resumption of trade tensions between the United States and China. These worries pushed down the major averages by more than 1% on Friday and propelled higher Fed expectations for rate cuts.

The market now sees a 50% chance that the Fed will cut rates at its July meeting, rising to 80% in September and 91.4% by the end of the year. Thursday, traders saw only 34.5% chance that the Fed drops its rates in July.

The Fed recently raised its rates in December and expects its next rise to take place in 2020. However, policy change quickly is not ruled out, according to Natixis economist Joe LaVorgna. He says the average time between the last rate hike and the subsequent reduction is seven months. A rate cut in September would be nine months from the last hike.

Natixis

"If the Fed does not meet investor expectations, financial conditions (for example, equities) could tighten considerably," said Thursday the Natixis economist, Joe LaVorgna. "This would have negative effects on an economy already slowing down."

Thursday's Trump announcement is the latest threat to a US economy that has already shown signs of slowing speed as tariffs on imports from Mexico would drive up prices for products like the auto, which could hurt consumer spending in the United States.

Recent reports on indicators such as nominal exports of goods and manufacturing activity have disappointed, and the GDP Now model of the Atlanta Fed shows that the US economy is expected to grow at a pace of 1.2% in the second quarter, down from the recently revised report Growth of 3.1% in the first quarter.

A rate cut would appease Trump. He has long called on the Fed to lower rates and begin quantitative easing, freeing up new money, saying it would stimulate the economy. "You would see a rocket," he told reporters in April.

And LaVorgna said Friday in a note that the Fed should lower its rates earlier than expected to push inflation up, as the Fed has not reached its 2% inflation target for the last 12 months.

"The current deviation of inflation from the target means that it would take 2% years – plus an average 2% inflation for the main PCE," wrote LaVorgna. "At this point, this seems highly unlikely given that inflation is extremely low in most countries of the world."

But others believe the Fed should stick to its previous plan and prepare for rate hikes by 2020.

"By December, we will witness a further acceleration of inflationary pressures, which will force the Federal Reserve to take steps to raise rates again," said Scott Minerd. Global Investment Manager at Guggenheim Investments, at the Milken Institute Global Conference, April 29. "Even if the economy is strong, the time is probably right for easing risky badets and preparing for any rate hikes."