Real Time Economics: Will the Fed Be Forced to Cut Interest Rates?


This post is by Jeffrey Sparshott from Real Time Economics


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Invesors are putting Fed’s wait-and-see strategy to the test, America’s friends are tired of the dollar’s dominance, and a productivity boom is maybe, possibly, hopefully just around the corner. Good morning. Jeff Sparshott here to take you through key developments in the global economy. Send us your questions, comments and suggestions by replying to this email.

The Fed is in a Bind

Trade tensions are complicating the Federal Reserve’s make-no-moves policy posture, Nick Timiraos writes.

  • Bond investors are increasingly betting the central bank will cut intererest rates to bolster the economy.
  • Fed officials have demonstrated their willingness to defuse looming economic threats. In January, they shelved plans to raise rates after a sharp pullback in stock and credit markets.
  • But the trade-war scenario is messy: It involves making assumptions hard-to-predict geopolitical risks, and officials are unlikely to move preemptively.
  • To make a cut, Fed officials would likely need to see proof that growth is slowing more than they expect: weaker data on consumer and business confidence, spending, and hiring. This raises the odds of a too-little, too-late reaction.

WHAT TO WATCH TODAY

U.S. gross domestic product for the first quarter is expected to be revised down to 3.0%  from 3.2% annualized growth. (8:30 a.m. ET)

U.S. trade in goods for April is out at 8:30 a.m. ET.

U.S. jobless claims are expected to rise to 215,000 from 211,000 a week earlier. (8:30 a.m. ET)

U.S. pending-home sales for April are expected to rise 0.9% from the prior month. (10 a.m. ET)

Fed Vice Chairman Richard Clarida speaks at the Economic Club of New York at 12 p.m. ET.

China’s official manufacturing index for May is out at 9 p.m. ET.

TOP STORIES

Dollar Undenominated

U.S. friends and foes, looking to buck American control over international trade, are developing systems that don’t rely on U.S. currency. The catalyst was the Trump administration’s decision to reimpose trade sanctions on Iran, Justin Scheck and Bradley Hope report.

  • The U.K., Germany and France didn’t support the sanctions, which include a ban on dollar transactions with Iranian banks. So they are fine-tuning a system to enable trade with Iran without using dollars.
  • India wasn’t happy either. It began using a similar alternative system in November.
  • China and Russia are striking deals to trade with yuan and rubles instead of dollars.
  • Global trade runs on dollars, giving the U.S. extraordinary power over nearly every entity that imports or exports anything anywhere. That clout has long made allies and enemies vulnerable to U.S. trade sanctions. The new arrangements won’t change the dollar’s dominance, but they will diminish the U.S.’s power to impose its policies.

Boom!

If the economy booms, thank software. Productivity and economic growth increasingly flow not from equipment, buildings or computer hardware, but from instructions, processes, coding and data: in other words, software, Greg Ip writes.

  • Technological evangelists have long argued artificial intelligence, machine learning, big data and other advances were about to unleash a new boom. But growth in productivity remained mired near generational lows.
  • Recently, however, there have been intriguing signs a boom may be in the offing. In the first quarter, American companies for the first time invested more in software than in information-technology equipment. Outside of buildings and other structures, software surpassed every type of investment.

Good News, Bad News

Corn prices are vaulting higher. That’s welcome news for farmers battered by weak commodity prices. But this time it’s because inclement weather put farmers well behind in their planting schedules and raised worries that swaths of farmland wouldn’t be sown at all. Over the past five years, U.S. farmers had planted 90% of their corn crop on average by this point in the growing season. This year, that figure has dropped to 58%, Joe Wallace reports.

Around the World

Britain’s opposition Labour Party leader, Jeremy Corbyn, said any Brexit deal should be put to a referendum. That is the strongest signal yet that a major British political party is willing to open the door to a vote that could cancel the U.K.’s exit from the European Union.

Germany’s jobless rate rose for the first time in more than five years in May. The adjusted jobless rate climbed to 5% from a record low of 4.9% in April, a sign the recent slowdown in growth is spreading further through Europe’s largest economy.

Canada’s Liberal government on Wednesday introduced legislation that would ratify the revised version of the North American free-trade pact, moving ahead less than two weeks after the Trump administration lifted tariffs on the country’s steel and aluminum exports.

Argentine unions held a national strike Wednesday, forcing banks to shut their doors, airlines to ground flights and a soccer final to be postponed. Many Argentines are upset with a sharp recession and rising prices. In April, inflation hit 56% while the economy shrank 6.8% in March.

QUOTE OF THE DAY

“China definitely won’t accept any deal that harms sovereignty and dignity.” —China Commerce Ministry spokesman Gao Feng, speaking to reporters Thursday

WHAT ELSE WE’RE READING (AND WATCHING)

These guys want to give the Fed a new mandate. “There’s an increasingly strong case that the Federal Reserve should cut interest rates to weaken the U.S. dollar and encourage greater exports—and that it should do it soon,” former CKE Restaurants CEO Andy Puzder and economics writer Jon Hartley write in a WSJ op-ed.

Must Xi TV: Fox Business’s Trish Regan and China Global Television Network’s Liu Xin squared off for a debate on U.S.-China trade relations. The broadcast was a rare chance for Beijing to reach out directly to an American audience. Look for yourself here.

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