Tariffs and the fed send stocks and interest rates lower
After a regularly scheduled two-day meeting, citing “implications of global developments for the economic outlook as well as muted inflation pressures, the Open Market Committee of the Federal Reserve, the body that dictates monetary policy, decided to cut its target rate for the Federal Funds Rate this past Wednesday by one-quarter percent to 2 to 2½ percent. The Federal Funds Rate is the rate at which member banks lend excess reserves to other member banks.
The much anticipated move was met coldly by investors as some were expecting twice that cut while others were hoping for a more dovish commentary from the Chairman of the Federal Reserve, Jerome Powell, during his postmeeting press conference. When asked if he thought the ¼ point cut was sufficient Powell stated that the committee was thinking of it as “essentially in the nature of a ‘midcycle adjustment’ to policy,” implying that it was most likely not the beginning of a “lengthy cutting cycle.”
In addition to cutting rates the Fed decided to provide an additional boost to the economy as it announced plans to end quantitative tightening, the process in which the Fed had been reducing its balance sheet by selling some of the bonds it held, back to the public.
Stocks moved sharply lower during the afternoon on Wednesday focusing like a laser beam on the words “midcycle adjustment” rather than on comments later in the press conference during which Powell stated that the Committee would “act as appropriate to sustain the [economic] expansion.”
After digesting the news overnight, the financial markets had wiped out their nearly 300-point loss from Wednesday by noon on Thursday until President Trump tweeted that “the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 billion Dollars of goods and products coming from China into our Country.” This is in addition to the 25% tariff on $250 billion of goods imported from China. Retail, Electronics and manufacturers will be especially hard hit if the tariffs go in effect as much of the raw and/or finished products in these industries are imported from China.
Who will benefit? In our opinion, internet retailer Amazon as their fixed costs are lower than brick and mortar retailers and as those retailers pass along price hikes to consumers, individuals will be exploring savings online. Banks should benefit from the cut in rates if the economy does not slow too precipitously as the margin between what banks credit depositors as compared to what they charge borrowers should widen.
All in all, President Trump may cagily be painting the Federal Reserve into a box. If the trade war with China lingers, the U.S. economy will weaken further, perhaps prompting more rate cuts from the Fed, which is just what the President has been calling for. Then, if a trade deal is subsequently negotiated with China, he will have had his cake and eaten it too – lower rates and as a result of a trade deal, a reaccelerating economy – just in time for the election!
Despite the potential for a negotiated trade agreement with China, as we have stated numerous times over the past year, we believe the battle for economic superiority between the two competitors will ultimately be measured in years, not months or quarters. Bottom line, expect the volatility to continue; think longterm and buy on substantial weakness.
Please note that all data is for general information purposes only and not meant as specific recommendations. The opinions of the authors are not a recommendation to buy or sell the stock, bond market or any security contained therein. Securities contain risks and fluctuations in principal will occur. Please research any investment thoroughly prior to committing money or consult with your financial advisor. Please note that Fagan Associates, Inc. or related persons buy or sell for itself securities that it also recommends to clients. Consult with your financial advisor prior to making any changes to your portfolio. To contact Fagan Associates, Please call 518-2791044.