The World in a Week – Dialling Down5th August 2019
The US Federal Reserve was in the limelight last week; Fed Chairman, Jerome Powell, delivered an unsurprising rate cut at his press conference, the first reduction in a decade. The 25bps clip was termed a ‘mid-cycle adjustment’ with Powell emphasising that the cut was not part of a steady trajectory of rate reductions and was merely a means of ‘insurance’. Markets fell sharply on this news, which was not the 50bps that some had hoped for. While markets initially took a dive, towards the end of his speech, Powell clarified that this did not mean further cuts are completely ruled out.
Other key news from Powell’s press conference was the Federal Open Market Committee announcing that they would bring quantitative easing to a standstill, selling off bonds previously bought in quantitative easing purchases. Originally, this move was scheduled for September but has been brought forward to August, Powell was clear that this move was to demonstrate that the Fed were exercising prudence, and not with a view that a potential recession was looming. The US economy remains in rude health, although trade wars continue to weigh on general sentiment.
On the topic of Trade Wars, Trump confirmed a further 10% of tariffs on £300bn worth of Chinese imports to the US, effective on 1st September 2019, which was delivered by tweet, of course. Markets reacted badly, stocks and commodities, notably oil, toppled, on the gloomy implications this could have for economic growth. It is uncertain how China will respond, but given their intervention in their currency market, firstly preventing the currency from strengthening too quickly, and more recently, weakening too quickly, currency could well be China’s chosen method of retaliation or more fittingly, their Trump card. As we write, the symbolic level of 7 Yuan to 1 US Dollar was breached, this is the lowest level since the Global Financial Crisis, which indicates at best a Superpower showdown and at worst, a full-blown trade war.
The question we are asking ourselves is whether Trump’s recent increase in tariffs, was a strategic move to force the Fed to cut interest rates further and stimulate the US economy, the fallout of this action will be seen in the coming weeks.