The market’s ultimate fear (tariffs) could turn into its biggest savior (Fed rate cuts).
President Trump’s tweet Thursday, announcing a 10% tariff on the remaining $300 billion worth of imports from China starting Sept. 1, could push the Federal Reserve to continue cutting interest rates.
That’s the assessment from top Wall Street analysts. The Fed announced a 25bp rate reduction on Wednesday, the first cut to short-term rates since December 2008.
“With those tariffs likely to have a more serious impact than previous measures, this reinforces our view that economic growth will slow sharply over the second half of this year, and is another reason to expect the Fed to cut interest rates by a further 50bp by early 2020,” wrote Capital Economics senior U.S. economist Andrew Hunter in a note to clients Friday.
Goldman Sachs analysts, led by chief U.S. economist Jan Hatzius, said the tariff announcement increases the odds of a September rate cut.
“While we have not changed our baseline view that the Fed will cut by a total of 50bps this year, the tariff announcement tilts the risks toward deeper cuts and raises our subjective odds of a September cut from 60% to 80%,” the Goldman Sachs analysts wrote in a note to clients.
Stock market wants more rate cuts
The market wasn’t satisfied with Wednesday’s rate cut, hence the steep stock market selloff which at one point pushed the Dow Jones Industrial Average (DJI) down almost 480 points. Wednesday’s cut was was interpreted one and done by the market, given Powell’s comments referring to the Fed’s decision as a “midcycle adjustment.” The market was looking for assurance that rate cuts would continue.
“Admittedly, there is an argument that, rather than being motivated by grievances with China, Trump is trying to jawbone the Fed into further monetary easing,” Hunter said. “After all, his announcement came only a day after an FOMC meeting when Chair Jerome Powell stressed that trade policy uncertainty was a key factor in officials’ decision to cut rates by 25bp – a move which Trump has lambasted as ‘not enough.’”
Hunter expects the 10% tariffs to rise to 25% by the beginning of 2020. Right now, there are 25% tariffs on $250 billion worth of imports from China.
Scott Gamm is a reporter at Yahoo Finance. Follow him on Twitter @ScottGamm.
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