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On Tuesday morning, Trump tweeted that he was expecting China to cut interest rates to offset the impact of US tariffs, adding that if the Fed was doing a "match" , the game would be over, we would win! "
China will inject money into its system and will probably, as always, reduce interest rates in order to make up for the market it loses and will lose. If the Federal Reserve made a "match", it would be over, we would win! In any case, China wants an agreement!
– Donald J. Trump (@realDonaldTrump) May 14, 2019
<p class = "canvas-atom-canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The & nbsp;increased its rates& nbsp; on 200 billion dollars of Chinese goods, from 10% to 25% Friday. On Monday, China reacted by announcing a tariff of up to 25% on a $ 60 billion portion of US goods & nbsp;from June 1st. The United States is now threatening to extend tariffs by 25% on a new $ 300 billion Chinese product. "Data-reactid =" 19 "> The administration has increased its tariff on $ 200 billion of Chinese goods from Friday to 10% On Monday, China responded by announcing tariffs reaching 25% on $ 60 billion worth of US goods beginning June 1. The United States now threatens to extend tariffs by 25% on new goods by $ 300 billion.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The United States hopes that it will be able to dismiss concessions Chinese technology transfers and intellectual property protections, but Trump may be looking for something else: lower and more accommodating rates from the Fed. For months, Trump called on the Fed to cut rates. & nbsp;up to 100 basis points. "data-reactid =" 20 "> The United States hopes to reconcile concessions on technology transfers and intellectual property protections imposed by the Chinese, but Trump may look for something else: lower rates and more the Fed, Trump called on the Fed to cut rates up to 100 basis points.
Chinese central bank governor Yi Gang speaks at a press conference on the sidelines of the National People's Congress at the Beijing Media Center on Sunday, March 10, 2019. (AP Photo / Andy Wong)
<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "The central bank of China eased its financial conditions in the middle of his worries about a slowdown, and recently & nbsp;reduced reserve requirement ratio& nbsp; for some national banks to stimulate further lending. In the United States, the Fed remains on hold with interest rates between 2.25% and 2.5% after having raised four times its rates in 2018. "data-reactid =" 41 "> The bank Central China eases its financial conditions concern over the slowdown and the recent lowering of reserve requirement rates of some domestic banks in order to further stimulate lending.In the United States, the Fed remains on hold with rates interest in a range of 2.25% to 2.5% after rising rates four times in 2018.
Trump's tweet on Tuesday morning raises the question of whether a US slowdown, triggered by tariffs, would prompt the Fed to intervene by lowering interest rates.
<h2 class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Fed open to rate cuts"data-reactid =" 43 ">Fed open to rate cuts
Few Fed officials have spoken since the tariff increase, but Boston Fed Presidents John Rosengren and New York John Williams have said they see downside risks to trade concerns. Both are voting members of this year's Federal Open Market Committee, which sets the rates.
John C. Williams, President and Chief Executive Officer of the Federal Reserve Bank of New York, addresses the Economic Club of New York, Manhattan Borough, New York, USA, March 6, 2019. REUTERS / Lucas Jackson
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "" If the impact of tariffs – and little The reaction of the financial markets to these tariffs is rather a factor of slowdown. So we have the tools at our disposal, including lower interest rates, without this necessarily generating the need to do so, "said Rosengren & nbsp;told Reuters on May 13. "data-reactid =" 65 ">" If the impact of the tariffs – and whatever the reaction of the financial markets to these tariffs – causes more slowing down, we have the tools at your disposal, especially the rates of 39, lower interest. that I necessarily expect this to generate the need to do so, "Rosengren told Reuters on May 13.
<p class = "web-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Williams & nbsp;said Bloomberg& nbsp; Tuesday, the tariffs would probably have "some negative effects on growth", pointing out that he considered the economy as "well placed to deal with all events likely to occur in the future". "data-reactid =" 66 "> Williams told Bloomberg Tuesday that the rates would likely have" some negative effects on growth ", stating that he considered the economy as" well placed to deal with all of them. " events that may occur in the future ".
Another factor to consider: inflation.
<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Although the Fed has & nbsp;struggled for inflation to reach its 2% goal, data-reactid = "68"> Even though the Fed has been striving to achieve an inflation target of 2%, higher prices could drive up prices for its consumers. US consumers at levels that would drive up personal consumption spending measures.
Williams said that inflation had already seen a "little boost" with existing rates and would expect a "more important" effect of higher fares.
Goldman Sachs wrote on May 14 that existing tariffs had increased basic PCE – which eliminates food and energy prices – by 20 basis points. The most recent reading of basic personal consumption expenditure was 1.6%.
Federal Reserve Chairman Jerome Powell speaks at the press conference following the Federal Open Market Committee meeting in Washington, DC, May 1, 2019. REUTERS / Yuri Gripas
They estimate that the broadening of tariffs would increase the basic PCE by 60 basis points to 90 basis points if the administration also imposed a 25% customs duty.
However, the estimates are very varied. A UBS rating of May 10 had predicted that broadening rates would increase core inflation by 21 basis points over the 7 basis points of current rates by 25%.
"The effect is noticeable, but not huge," wrote UBS.
Historically, a rise in inflation has prompted the Fed to cut rates to protect itself against uncontrollable price increases. But Fed officials insisted that they would have to witness persistent changes in inflation or, more generally, economic data, before changing its "patient" position vis-à-vis screw rates.
This approach applies to fares, where policymakers may want to see more permanent underlying impacts on the US economy before being convinced of a rate cut.
<h2 class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "70% are banking on a rate reduction by December"data-reactid =" 100 ">70% are banking on a rate reduction by December
Nevertheless, the markets are optimistic about the outlook for the Fed's easing policy.
A week ago, before US tariffs increased, federal fund futures provided a 58.4% probability that the central bank would reduce rates at least once before its meeting. of December.
Tuesday morning, these probabilities had jumped to 70.3%.
Bank of America Merrill Lynch's survey of global fund managers for the month of May found that markets could push the Fed to cut spending if indicators went red. Respondents said the S & P 500 is expected to fall to 2305 percent before the Fed cuts rates, a decline of about 22 percent from the intraday peak of 2954.13 (1).
The last time the S & P index was as low was in February 2017, in a climate of uncertainty about the Fed's efforts to normalize rates. It was also the first weeks of Trump's presidency.
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<p class = "canvas-atom canvas-text Mb (1.0em) Mb (0) – sm Mt (0.8em) – sm" type = "text" content = "Brian Cheung is a journalist covering the banking sector and the intersection of finance and Yahoo Finance policy. You can follow him on Twitter @bcheungz."data-reactid =" 107 ">Brian Cheung is a journalist covering the banking sector and the intersection of finance and Yahoo Finance policy. You can follow him on Twitter @bcheungz.
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