Date: July 31, 2019
Fed Looks Locked In for Quarter-Point Cut: Decision Day Guide
“The Federal Reserve is widely expected to lower interest rates by a quarter-point at its meeting that concludes Wednesday and leave the option open for additional moves despite demands by President Donald Trump for a “large” rate cut. “We may get a dissent or two, but it seems like a 25-basis-point cut is pretty much locked in,” said Julia Coronado, president and founder of MacroPolicy Perspectives LLC in New York. The Federal Open Market Committee will issue a policy statement at 2 p.m. after the two-day meeting concludes and Chairman Jerome Powell will brief reporters 30 minutes later. The immediate outlook for policy has been made crystal clear thanks to a communications flub by New York Fed President John Williams in a July 18 speech. Odds for a half-point cut rose after he recommended swift policy action if the economy weakens when rates are low, but fell back after the bank later clarified that he was not discussing upcoming policy moves. Trump weighed in on Williams’s remarks, saying a day later that he liked his first statement much more than his second. The meeting still contains drama. It’s unclear how much opposition even a quarter-point cut will face within the FOMC, or what signal will emerge about the scope for further easing. Underlying both questions are uncertainties about just how much the U.S. economy is likely to slow and how monetary policy should respond. “For a lot of them, 25 will feel like a down payment,” said William English, a professor at Yale University and former senior Fed economist. “But I think they’ll be willing to wait to get more information and make a decision about how much easing to do over time.” Before Williams spoke on July 18, investors were pricing in a quarter-point cut. Powell had laid out the case for easing amid global economic uncertainties and muted inflation. Other policy makers argued for lowering rates in a “risk management” approach. In his remarks, Williams reviewed his long-standing belief that central banks should move aggressively in a downturn when rates are near zero. Investors took it as a signal that a half-point move might be on the table, until the New York Fed issued the clarification. That steer, combined with a solid — though not spectacular — report on second-quarter economic growth, reduced the chances of a half-point cut to “almost zero,” said Carl Tannenbaum, chief economist at Northern Trust Corp. in Chicago. The data showed the U.S. economy expanded at an annualized pace of 2.1%, slower than the first quarter but above the 1.8% expected by economists.”
Euro-Area Economy Left Struggling as Growth, Inflation Slow
“Economic growth in the euro area slowed dramatically in the second quarter, the latest in a string of reports flagging deteriorating economic prospects that increase the chance of more European Central Bank stimulus. Cooling momentum risks extending a phase of too-low inflation that’s worrying policy makers. At their last meeting, ECB officials ordered staff to study everything from interest-rate cuts to asset purchases as they look at ways to prop up the economy. The latest data showed the 19-nation region expanded 0.2% last quarter, down from 0.4% in the previous three months. That left year-on-year growth at 1.1%, its weakest in more than five years. Inflation slowed to 1.1% in July, the lowest since early 2018, and a gauge excluding volatile components such as food and energy was even weaker. The reports confirm a trend observed in some of the region’s largest economies. Growth slowed in France, Spain, Austria and Belgium and the economy stagnated in Italy. Concern about the state of the euro-area economy and expectations of ECB action have driven investors into the German bond market. The yield on the nation’s 10-year debt is below minus 0.4 percent, the current level of the ECB’s deposit rate. Much of the slowdown engulfing Europe is linked to manufacturing and global trade tensions, with German industry hit particularly hard. Germany’s GDP figures aren’t due until Aug. 14 — though the euro-zone estimate normally includes some German data provided to Eurostat by the country’s national statistics office. Separate figures on Wednesday showed a small increase in German jobless claims in July. Companies there and across the region have issued profit warnings in recent weeks, pointing to trade tensions and weaker global growth. Deutsche Lufthansa reported the first loss for 2 1/2 years at its freight arm as it flew with the most empty space in a decade. An imminent improvement isn’t in sight. The U.S. and China concluded a new round of trade talks in Shanghai with little evidence of progress toward ending their year-long dispute. At the same time, corporate results in the Asian country are painting a dire picture, with some 40% of the more than 1,600 firms to give first-half guidance predicting a drop in earnings from a year earlier.”
China Says U.S. Trade Talks to Continue With September Meeting
“China and the U.S. plan to meet again in September to extend trade talks, as the latest round of negotiations in Shanghai ended with signs the sides discussed Chinese purchases of American farm products — a key demand of President Donald Trump. U.S. delegates including Treasury Secretary Steven Mnuchin and Trade Representative Robert Lighthizer wrapped up talks with their Chinese counterparts including Vice Premier Liu He Wednesday afternoon at the Xijiao State Guest Hotel, according to a pool report. The U.S. delegation, which arrived Tuesday afternoon, was heading to the airport about 24 hours later. The negotiators from Beijing and Washington discussed China’s imports of agriculture products from the U.S. based on its needs, state-run news agency Xinhua reported, adding that the September gathering will include high-level officials. The countries have alternated hosting a series of meetings in their more than year-long trade war. The latest round of talks took place against a backdrop of a fresh outburst by Trump, who, as delegates gathered Tuesday, let fly at China’s perceived unwillingness to buy American agricultural products and said it continues to “rip off” the U.S. S&P 500 futures stayed higher after the September meeting was announced. Relations between the delegates appeared cordial, according to the pool report. Xinhua said it was a candid, efficient and constructive exchange on major economic and trade issues. China’s trade minister Zhong Shan played a more prominent role in the discussions than in previous rounds. His greater involvement had caused concerns among some U.S. delegates as he is perceived as tougher negotiator. The Americans arrived in Shanghai on Tuesday and attended a dinner at the Fairmont Peace Hotel in the evening. A person familiar with the event described the atmosphere at the dinner as being all about rapport building without substance on negotiations. The People’s Daily, mouthpiece of the Communist Party, responded to Trump on Wednesday with a commentary saying that China has no motive to “rip off” the U.S. and has never done so, and China won’t make concessions against its principles on trade. On Wednesday, China’s foreign ministry spokeswoman Hua Chunying said at a briefing in Beijing that it doesn’t make any sense for the U.S. to exercise a maximum-pressure campaign. “Only when the U.S. shows enough sincerity and good faith can we achieve progress in the trade talks,” she said.”
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