Fed Inches Toward Rate Cut as Trade War Frays Patience
The Federal Reserve’s top policy makers aren’t yet ready to cut interest rates, but worsening trade tensions are nudging them in that direction. In separate comments Tuesday, Fed Chair Jerome Powell and his No. 2, Richard Clarida, reassured nervous investors they’re watching closely for signs that disputes between the U.S. and its trading partners are denting the outlook for the world’s largest economy. Their remarks moved the Fed slightly closer to its first rate cut since 2008. “Powell may have opened the door a crack wider to the possibility that the Federal Reserve will ratify one or two of the rate cuts the markets have discounted this year,’’ said Chris Rupkey, chief financial economist at MUFG Union Bank NA. Other Fed watchers said Powell and Clarida fell short of signaling a move at the June 18-19 gathering of the Federal Open Market Committee. Clarida declared the Fed “can’t be handcuffed” by market pricing that can be volatile.
EU Sets in Motion Discipline Process Against Italy Over Debt
The European Union took the first step toward disciplining Italy over its failure to rein in debt, intensifying a dispute with Rome and paving the way for an initial penalty of as much as 3.5 billion euros ($4 billion). In a report published Wednesday, the European Commission said Italy hasn’t made sufficient progress in reducing its mountain of debt in line with the bloc’s fiscal rules, and that a disciplinary process is “warranted.” The step marks an escalation of the country’s budget tussle that roiled markets at the end of 2018 and is a warning for Italy’s populist leaders, particularly Deputy Premier Matteo Salvini who has vowed to change EU budget rules. Italy’s FTSE MIB index of stocks dropped as much as 0.7% on the news, with banks including UniCredit and Intesa Sanpaolo posting some of the steepest declines. Italian bonds fell following the report, with the 10-year yield spread over Germany, a widely watched gauge of risk in the nation, touching 280 basis points — more than twice the rate since before the League-Five Star government was formed.
IMF Cuts China Growth Forecast, Citing Trade War Risks
The International Monetary Fund trimmed its forecasts for economic growth in China, and said the trade war with the U.S. is tilting the balance of risks to the downside. The world’s second-largest economy is forecast to expand by 6.2% this year and 6.0% in 2020, a 10th of a percentage point down from the previous estimate in both cases, the fund said at a briefing in Beijing Wednesday. “China and its partners should work constructively to address shortcomings in the trading system,” the fund said in a release on the completion of its annual Article IV mission to China. At the same time, the IMF said that no further policy stimulus would be needed to support the domestic economy, “provided there are no further increases in tariffs or a significant slowdown in growth.” China’s economy is undergoing a domestic deceleration and rising tensions with the U.S., which is raising tariffs on Chinese exports and looking to cut off companies such as Huawei Technologies Co. from the U.S. market. President Xi Jinping said this week that output is stabilizing and has improved noticeably, the latest in a series of official statements talking up the strength and resilience of the economy.