President Trump isn’t the only leader wrestling with internal conflict over the strength of the economy.
As the president reversed himself Wednesday on the possibility of a payroll tax cut, declaring it unnecessary to juice a “strong economy,” Federal Reserve officials revealed they are more split than they have acknowledged over how to confront mixed signals amid slowing growth.
The divide among monetary policymakers — spelled out in the minutes of their July 30-31 meeting — at which they cut interest rates for the first time in a decade — centered on whether to go even further, reducing rates to jump-start growth or to refrain from acting at all, since certain measures point to strong fundamentals.
According to the minutes, “a couple” Fed participants favored trimming rates by half a percentage point, twice the size of the cut the central bank settled on, while “several” wanted the Fed to stay the course, “judging that the real economy continued to be in a good place, bolstered by confident consumers, a strong job market, and a low rate of unemployment.”
A lot has arguably changed in the three weeks since that meeting. Trump ramped up his trade war with China by announcing he would impose new tariffs on $300 billion of Chinese imports, mostly consumer goods, then partially delayed that move until mid-December. That escalation, a flashing recession warning from the bond market, and signs major foreign economies could be tipping into recession have sent stocks on a roller coaster.
The trade war threatens to weigh on growth at home, according to a Wednesday report from the Congressional Budget Office, which found business investment is already falling off due to uncertainty over tariffs. Not to mention that the Labor Department on Wednesday revised its estimates of job gains downward, finding that in the 12-month period ending in March, the economy added a half-million fewer jobs than reported.
It’s not yet clear whether the new developments will foster more agreement among Fed officials about the right path forward. Federal Reserve Chair Jerome H. Powell could offer clues when he delivers a speech Friday in Jackson Hole, Wyo., that will be intensely watched by investors and economists.
From Grant Thornton chief economist Diane Swonk:
3 Reasons for cuts where: slower growth, hedging against weaker growth abroad and escaping trade tensions, and too tepid inflation. Powell will empathize these in Jackson Hole speech and explain more clearly the concept of a “mid-cycle adjustment.” Need much definition.— Diane Swonk (@DianeSwonk) August 21, 2019
For Trump’s part, even as his policies compound the pressure on the Fed to navigate increasingly perilous conditions, the president continues heaping blame on the central bank itself:
.....We are competing with many countries that have a far lower interest rate, and we should be lower than them. Yesterday, “highest Dollar in U.S.History.” No inflation. Wake up Federal Reserve. Such growth potential, almost like never before!— Donald J. Trump (@realDonaldTrump) August 21, 2019
....WHERE IS THE FEDERAL RESERVE?— Donald J. Trump (@realDonaldTrump) August 21, 2019
A closer look at the stock market's recent performance suggests investors have been more focused on Trump's moves in the trade war than the decision-making from the Fed. "In the past year, the trade war has had a comparable grip on the public imagination, not just politically but in markets and board rooms where cold financial calculations prevail," the Wall Street Journal's Greg Ip reports. "Of the 20 largest percentage declines in the S&P 500 stock index in the past 12 months, trade was the main—or one of the main—causes in six, according to financial news reports... The Fed was cited as a cause in just four cases."
Perhaps no surprise then that behind closed doors back in July, Fed officials framed their quarter-point interest rate cut as a “recalibration,” rather than the beginning of a sustained push toward a more accommodative stance. A number of participants highlighted the need to “remain flexible and focused on the implications of incoming data for the outlook.”
But deteriorating conditions since will make that a tough line to hold, Pantheon Macroeconomics Chief Economist Ian Shepherdson wrote in a Wednesday note.
“The Dow now is more than 1,000 points off its pre-meeting peak. This is likely to impinge on upcoming business surveys and already appears to have hit consumer confidence, so we’re expecting Chair Powell and his more dovish colleagues to be able to push through another 25bp easing next month,” he wrote. “After that, we think a combination of decent Q3 GDP growth and solid inflation numbers mean that a pause is more likely than a third easing in October, but we accept that just one errant tweet from the President could change everything.”
And Goldman Sachs economists said whatever hawkishness Fed officials were reflecting at the the July meeting has grown “stale.” The bank left the odds they have assigned to a quarter-point rate cut in September unchanged at 75 percent (and the team pegs the chances of a half-point cut at 15 percent.)
JPMorgan economists reached a similar conclusion, via CNBC's Carl Quintanilla:
JPMORGAN: “While the minutes stress data dependency, we continue to believe the darkening global picture will prompt another easing in September, with possibly more to come.”— Carl Quintanilla (@carlquintanilla) August 21, 2019
(via @pattidomm) pic.twitter.com/b6JzsNYgMv
Monetary policymakers appeared to add more grist to the case for further easing by nodding to investor expectations. “Revealingly, participants noted that low borrowing costs and high equity prices were ‘premised importantly’ on expected Fed rate cuts,” Michael Pearce, senior US economist for Capital Economics, wrote in a note. “Translation: The Fed is petrified of upsetting the markets and will therefore continue cutting rates.”
Even as Trump looks primed to get more of what he wants from the Fed, some economists say he should be wary of depleting the federal government’s recession-fighting arsenal too early. “The Fed is targeting a historically low 2 to 2.25 percent interest rate, and the central bank simply can’t cut rates as much as it has in the past,” my colleagues Jeff Stein and Jonnelle Marte report. “During the last seven recessions, the Fed has cut interest rates by at least 5 percentage points, according to Jay Shambaugh, senior fellow in economic studies at the Brookings Institution.”
And as for reviving other strategies the Fed has used more recently, like buying up assets to pump liquidity into the financial system, Ernie Tedeschi, an economist in the Obama Treasury Department, said, “We tested these out in a way we hadn’t before. The Fed have may tools in its tool kit, but those tools might be less effective.”
PROGRAMMING NOTE. Today’s edition of the Finance 202 will be the last until after Labor Day. See you back here on Sept. 3rd. And here’s hoping you have a great finish to the summer in the meantime.
— Deficit swells. WSJ's Kate Davidson: Federal deficits are projected to grow much more than expected over the next decade after a budget agreement struck last month, pushing government debt as a share of the economy closer to the highest level since World War II, the Congressional Budget Office said.
"The deal agreed upon by congressional leaders and the White House will add roughly $1.7 trillion to deficits between 2020 and 2029, assuming federal spending continues to rise by the rate of inflation beyond 2021... In total, deficits are now expected to rise $809 billion more than the agency projected just a few months ago, bringing total deficits over the next decade to $12.2 trillion."
— German recession warnings mount. Bloomberg's Carolynn Look: "German manufacturers are reinforcing concern that Europe’s largest economy is headed into a recession. A nationwide gauge showed orders at factories and services companies are dropping at the fastest pace in six years, and more companies now expect output to fall than rise over the next 12 months. That’s the first time that’s happened since 2014, according to the Purchasing Managers’ Index from IHS Markit."
- It could spell bad news for Europe: "The peek into the engine room of European industry provides a damning snapshot of the economy, which shrank in the second quarter. The persistent weakness -- driven in particular by mounting global trade tensions, car industry woes and slowing demand in China -- doesn’t bode well for the broader euro area."
Meanwhile, France expects a no-deal Brexit. More from Bloomberg: "The French government expects the U.K. to leave the European Union without a withdrawal agreement, an official in President Emmanuel Macron’s office said, meaning the immediate imposition of border controls after Brexit at the end of October. A so-called no-deal Brexit is now the central scenario for France, the official said. The comments come after British Prime Minister Boris Johnson sent a letter to EU officials demanding the removal of the controversial Irish border backstop from the deal, something the bloc has repeatedly refused to do."
— Trump reverses on payroll tax cut: “Trump said Wednesday he is no longer looking to cut payroll taxes, pivoting away from an option he’d confirmed was under consideration a day earlier,” my colleague Rachel Siegel reports.
“On Tuesday, Trump confirmed he was weighing a temporary payroll tax cut and other measures, seemingly acknowledging that rising fears of a slowdown extended to the Oval Office. In the past, he has praised the strength of the economy while also floating steps that are usually reserved for periods of economic struggle, such as doubling down on the Fed to cut interest rates. Trump’s acknowledgment of the payroll tax plan came one day after The Washington Post reported that several senior White House officials had begun discussing the option. At the time, the White House publicly denied those discussions.”
— Trump’s praise of Germany’s interest rate leaves out key detail: “President Donald Trump lauded Germany’s ability to sell bonds with no interest Wednesday, but he didn’t mention that Germany failed to sell more than half of what it brought to auction,” CNBC’s Patti Domm reports.
“The German government sold 869 million euros of 30-year bonds with a negative yield, for the first time ever, adding to the world’s growing $15 trillion in existing negative yielding debt. The bund, set to mature in 2050, has a zero coupon, meaning it pays no interest. Germany offered 2 million euros worth of 30-year bunds, and investors were willing to buy less than half of it, with a yield of minus 0.11%.”
— Trump slams auto execs. The president took to Twitter on Wednesday to lash out at carmaker executives for fighting his plan to rollback Obama-era emissions standards on the industry:
My proposal to the politically correct Automobile Companies would lower the average price of a car to consumers by more than $3000, while at the same time making the cars substantially safer. Engines would run smoother. Very little impact on the environment! Foolish executives!— Donald J. Trump (@realDonaldTrump) August 21, 2019
The Legendary Henry Ford and Alfred P. Sloan, the Founders of Ford Motor Company and General Motors, are “rolling over” at the weakness of current car company executives willing to spend more money on a car that is not as safe or good, and cost $3,000 more to consumers. Crazy!— Donald J. Trump (@realDonaldTrump) August 21, 2019
....that when this Administration’s alternative is no longer available, California will squeeze them to a point of business ruin. Only reason California is now talking to them is because the Feds are giving a far better alternative, which is much better for consumers!— Donald J. Trump (@realDonaldTrump) August 21, 2019
— China to U.S.: Meet me in the middle. AP's Joe McDonald: "China appealed to Washington on Thursday to 'meet each other halfway' and settle a trade war instead of going ahead with planned tariff hikes Beijing warned will trigger retaliation. Exporters are preparing for a Sept. 1 increase in U.S. duties in a fight over trade and technology. Those are due to go ahead on more than $100 billion of Chinese goods despite the Trump administration’s decision to postpone some other planned increases to mid-December. New U.S. tariffs will 'lead to an escalation of economic and trade friction,' a Ministry of Commerce spokesman, Gao Feng, said at a news briefing."
Trump, meanwhile, declared himself "the chosen one" to confront China on trade. See him here:
Here's the clip. Speaking about his trade war with China, Trump looks to the heavens and says, "I am the Chosen One." pic.twitter.com/mKWA9g7wzQ— David Mack (@davidmackau) August 21, 2019
— Manufacturers find it hard to leave China: “With the U.S. and China tangled in a nasty trade fight, this should be Vietnam’s time to shine. Instead, it is becoming increasingly clear that it will be years, if ever, before this Southeast Asian nation and other aspiring manufacturing destinations are ready to replace China as the world’s factory floor,” the WSJ's Niharika Mandhana reports.
“The specialized supply chains that made China a production powerhouse for smartphones and aluminum ladders and vacuum cleaners and dining tables are nowhere near as developed in Vietnam. Factories with U.S.-focused safety certifications and capital-intensive machinery aren’t as easy to find. And Vietnam, with less than one-tenth China’s population, is already running into labor shortages as global manufacturers rush to set up shop here to avoid U.S. tariffs.”
— Court documents allege Huawei ties to Iran and Syria: “New details about the U.S. sanctions-busting case against Huawei Technologies Co. emerged in court filings in Canada, including about the Chinese telecom giant’s alleged dealings in Iran, Syria and Sudan,” WSJ’s Dan Strumpf reports.
“In the latest filings, U.S. authorities more closely tie Huawei to a company known as Skycom Tech Co., a Hong Kong company that did business in Iran and that is at the heart of the U.S. case against Huawei. The U.S. has alleged that Skycom was under Huawei’s control for much longer than the company disclosed to its banks.”
— “Let’s call the whole thing off”: “Mexican tomato producers struck a last-minute agreement with the Trump administration to avert an anti-dumping investigation and end a tariff dispute that has rumbled on for months, government officials said on Wednesday,” Reuters’s Dave Graham reports.
“Under the draft accord with the U.S. Commerce Department, the majority of Mexican tomato exports will be subject to U.S. border inspections, and specialty tomatoes face higher reference prices on the American marketplace. Mexican Economy Minister Graciela Marquez said on Twitter the accord kept the U.S. market open for exporters, while the Commerce Department said it ‘has enforcement provisions that completely eliminate the injurious effects of Mexican tomatoes, as well as price suppression and undercutting.’ ”
— Retail divide widens: “Retailers offering deals, from bargains on brand-name goods to conveniences such as free shipping, are snaring customers at the expense of chains that have been slow to innovate,” WSJ’s Suzanne Kapner reports.
“Walmart Inc., Target Corp. and T.J. Maxx parent TJX Co have reported strong sales growth and an uptick in visitors to their stores. Macy’s Inc., J.C. Penney Co., Nordstrom Inc. and other middle-market chains continue to struggle.”
— The Apple of his i: “[Trump] likes Apple CEO Tim Cook. But it's not necessarily because he's running a big and successful business. Rather, Trump said Cook calls him ‘whenever there is a problem,’ ” CNBC’s Kif Leswing reports.
“Last week, Cook joined Trump for dinner at the Trump National Golf Club in Bedminster, New Jersey. Their warm relationship stands in stark contrast to Trump's position on other top executives, whom he frequently antagonizes.”
— Warren slams Wells Fargo over fees, again: “Senator Elizabeth Warren of Massachusetts has asked Wells Fargo’s interim chief executive to explain the bank’s policies for charging overdraft fees on transactions in accounts its customers believed to be closed, costing them hundreds or even thousands of dollars,” the New York Times’s Emily Flitter reports.
“In a letter to C. Allen Parker on Monday, Ms. Warren asked how much money the bank had collected over the past five years by charging overdraft fees on empty accounts past the dates on which accounts were supposedly closed. The practice was disclosed in a New York Times article last week.”
— Amazon offers Congressional critics tour de force: “From the White House to the campaign trail for the Democratic presidential nomination, politicians have found a popular punching bag in Amazon, accusing the retail giant of paying subsistence wages to warehouse workers while dodging taxes,” my colleague Jay Greene reports. “That’s one reason Amazon has aggressively courted members of Congress to walk the floors of its vast warehouses, afterward noting those visits on its social media accounts.”
“For years, critics have accused the company of underpaying and overworking warehouse employees. … In response, the online retail giant has started a campaign to try to turn the tide — particularly as regulators take a closer look at the company for possible abuse of power.” (Amazon founder and chief executive Jeff Bezos owns The Washington Post.)
“The efforts, though, haven’t seemed to tone down the political rhetoric.”
- Dick’s Sporting Goods, Hewlett-Packard, Hormel Foods, the Gap, Toro and Williams-Sonoma are among the notable companies reporting earnings, per Seeking Alpha.
- Federal Reserve Chair Jerome H. Powell kicks off the board's annual Jackson Hole Economic Policy Symposium on Friday.
- Foot Locker, Meredith, Red Robin Gourmet Burgers and the Buckle are among the notable companies reporting earnings on Friday, per Seeking Alpha.
From The Post's Ann Telnaes: