Conflicting signs on U.S. economy put Fed on the hot spot
The stock market has hit fresh record highs, the U.S. banged out a hefty amount of new jobs in June and the White House and China agreed to put off new trade penalties. So all is well with an economy now entering a record 11th year of expansion, right?
Not if Wall Street is to be believed.
Investors still think the Federal Reserve will cut already low interest rates at the end of July, an insurance policy of sorts against what they believe is a U.S. economy that’s more susceptible to recession.
“The answer can be pretty much boiled down to one word — trade,” said Douglas Porter, chief economist at BMO Capital Markets.
Simply put, Wall Street worries the recent trade truce with China won’t last, leading to higher tariffs by both countries later in the year. And when the world’s two largest economies fight, the bystanders, in this case the rest of the world, get hurt.
What might also drive the Fed to cut rates is surprisingly low inflation and the prospect that prices could wane further in the months ahead. The cost of oil CL.1, +0.38% has dropped almost $10 a barrel since April, for one thing, and wage gains for American workers have leveled off.
A pair of fresh readings this week on consumer and wholesale prices are likely to show that inflation remains muted. The pace of inflation using the Fed’s preferred PCE gauge is running around 1.5% — well below the central bank’s 2% goal that it views as ideal for the economy.
What does Fed Chairman Jerome Powell think about the mishmash of conflicting economic reports? Investors will find out on Tuesday when he delivers his annual mid-year update to Congress.
Not only does Wall Street believe Powell and Co. will trim interest rates, President Trump is also pressuring them to reduce the cost of borrowing.
Powell, for his part, said last month the Fed wanted to more time to evaluate the economy. While stronger employment gains are a bright spot, falling inflation and spreading global economic weakness might be too worrisome to ignore.
Powell’s testimony will be scrutinized for hints on whether a rate cut is coming sooner rather than later.
“Whether the first cut comes in July, as the markets expect, or September is a close call,” said Andrew Hunter, senior U.S. economist at Capital Economics.