August 21, 2019

TOOL OF THE TRADE

TOOL OF THE TRADE

Now that China has responded in kind to the Economist-In-Chief’s tariffs by lowering the Yuan, the FED is going to come under renewed presidential pressure to lower interest rates once again. For as President Trump enters his election year, he has not come close to delivering on his ill-advised promises to significantly improve the economy.

In fact, the economy has been improving at the same pace (perhaps lower) for the past 12 years, and – while not stellar – it provides absolutely no excuse to lower interest rates. Moreover, before the interest rate hike went into effect, lower rates were fueling overblown equity markets with cheap cash, not the economy; and the amounts that went into economic development were disappointingly minimal.

China Fights Back

Undoubtedly, Chinese leaders find it easier to lower their currency values than does the leader of the free world, who must threat and cajole a Federal Reserve that answers to Congress, not the White House. And if Trump insists on using tariffs as his weapon of choice, the Chinese have no choice but to respond with the weapons they find at hand – a battle of non-equals by all accounts.
They have since “adjusted” the Yuan rate twice, prompting the US President to brand China a currency manipulator. But the G7 and IMF, with whom he did not consult, were miffed, perhaps understand that the longer the US president wreaks havoc with the world economy, the closer he pushes the rest of the world towards China, and refuse to cooperate with Trump in his assessment.

FOMC – Caught in the Middle

Now, with global growth threatened, oil down, gold trading up, and the US on the brink of a recession, the FED must respond to the damage of a trade war without becoming a tool in its enactment. How they go about that will be seen in Wednesday’s FOMC meeting minutes.

Will the Fed minutes provide forward policy guidance, and how will the market react?