Federal Reserve Chairman Powell’s measured consideration of the central bank’s role in promoting economic growth in an atmosphere of trade conflict, market volatility and Presidential admonitions satisfied no one.
Stocks were pummeled by trade war fears and the rising chances that the conflict will lead to a US and global recession.
Early in the day China announced tariffs on $75 billion of US exports. Trump responded by calling on US companies to find alternatives to China. He was scathingly critical of the Fed for inaction after Powell’s speech in Jackson Hole.
The 2-10 Treasury spread inverted again and was trading even at 3:15 Pm in New York. The dollar sank after the 10:00 am Powell speech losing about 40 points against the euro and more than a figure versus the yen.
The Fed is reaching for its historical role as a guide in the trade dispute. But as Mr. Powell admitted, there is little precedent for such a situation.
The turmoil created by the trade war and its rhetoric has created an atmosphere that will leave the Fed little choice. The Fed has staked its rate policy on maintaining the US expansion and insulating the economy as best it can from a potential downturn.
The more markets flail and shudder from the trade rhetoric, the greater the threat to the positive psychology of the US expansion. Businesses have already succumbed to the trade war. Will the consumer be next? Presidents Trump and Xi are creating a stronger case for Fed action.
In the end the governors will likely do what the markets and the President want, reduce rates faster and farther than at any time since the financial crisis.
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