Real Time Economics: The Fed Weighs a Rate Cut and the White House Considers a Tariff Increase

This post is by Jeffrey Sparshott from Real Time Economics

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The U.S. Trade Representative opens hearings on new China tariffs, the Fed has a tough task on communication this week and corporate bond investors don’t seem too worried about the economy. Good morning. Jeff Sparshott here to take you through the day’s economic news. Send us your questions, comments and suggestions by replying to this email.

Like a Good Neighbor

The Federal Reserve usually cuts interest rates because bad things are happening. Sometimes, though, it cuts rates because the risk of bad things has gone up—like taking out an insurance policy, Nick Timiraos writes.

  • The precedents: In 1995, the Fed lowered rates even though stock markets were rallying, helping prevent a slowdown from turning into a recession. The Fed took out insurance again in 1998 to prevent potential market meltdown after Russia’s debt default.
  • This time it’s different: Rate cuts in 1995 “started from a level in which the funds rate was clearly restrictive,” said Donald Kohn, a senior Fed economist in 1995. Economic weakness was more evident in the data than today. And trade policy remains a wildcard.
  • Fed officials meet Tuesday and Wednesday. They must consider whether a worsening of trade tensions and the recent slowdown in hiring and industrial activity might warrant similar insurance, if not this week, then later this summer.

What to Watch Today

The New York Fed’s Empire State Survey for June is expected to drop to 10.5 from 17.8 the prior month. (8:30 a.m. ET)

The National Association of Home Builders housing market index for June is expected to tick up to 67 from 66 the prior month. (10 a.m. ET)

European Central Bank President Mario Draghi speaks at an ECB central banking forum in Sintra, Portugal, at 1 p.m. ET.

The U.S. Trade Representative’s office opens seven days of hearings on new China tariffs.


Dippin’ Dots

Fed officials are moving into unfamiliar territory with their dots. So far, policy makers have used their so-called dot plot only to signal the anticipated path of interest rate increases. This week, the question is whether they will do the reverse, Nick Timiraos writes.

  • The most recent dot plot showed 11 officials expected the fed-funds rate to remain unchanged through 2019, four thought the rate would rise by a quarter point and two expected a half point.
  • The dot plot doesn’t neatly provide a way to differentiate between different economic scenarios—for example resolution versus escalation of the U.S.-China trade fight.
  • It’s also unclear if officials will feel comfortable projecting rate cuts if they don’t lower rates at this week’s meeting. If it’s appropriate to cut rates, why wait?
  • The risk: Bond markets already expect the Fed to make at least two quarter-percentage point cuts this year. A dot plot that doesn’t project cuts could provoke a sharply negative investor reaction.


That’s Gonna Sting a Bit

The U.S.-China trade conflict is moving closer to home. Consumer items, largely spared by existing tariffs on Chinese imports, would face 25% levies under the Trump administration’s plan targeting $300 billion of Chinese goods, Anthony DeBarros and Josh Zumbrun report.

  • The biggest targets would be mobile phones and laptops, according to a WSJ analysis. The U.S. imported $43 billion in mobile phones last year from China, and $37 billion in laptops. Other major categories: $11.9 billion tricycles and scooters, $5.4 billion of videogame consoles and $4.6 billion of computer monitors.
  • China would be hit too, and already it’s economy is slowing. The country’s latest industrial output and investment data have some economists thinking economic growth could fall below the government’s 6% bottom line—unless there is more stimulus.
  • The U.S. campaign against Huawei Technologies  is taking a toll, with the company’s founder forecasting a hit to revenue of about $30 billion over the next two years.


The U.S. Trade Representative’s office opens seven days of hearings on new China tariffs today, where businesses can make a case for or against additional levies.

What Else We’re Following

Commerce Secretary Wilbur Ross played down prospects of a major trade deal if President Trump and China’s President Xi Jinping meet at the Group of 20 summit in Japan later this month. “I think the most that will come out of the G-20 might be an agreement to actively resume talks,” Mr. Ross said. “At the presidential level they’re not going to talk about the details of how do you enforce a trade agreement.”

Eurozone wage growth accelerated and unemployment continued to fall in the first three months of 2019. That should offer a boost to consumer spending and growth for an economy that is struggling to maintain its expansion in the face of weaker demand for its exports. Pay per hour worked rose 2.5% from the first quarter of 2018, the heftiest increase since records began at the start of 2010, Paul Hannon reports.

Corporate bonds are giving a reassuring signal about the economy. In recent weeks, the extra yield, or spread, investors demand to hold U.S. corporate bonds over Treasurys has generally increased, a sign of reduced risk appetite among investors. Spreads, however, have leveled off in recent days and remain well below the levels they reached in early January and during previous growth scares, Sam Goldfarb reports. The modest moves are notable because investors view credit spreads as an important indicator of the health of the U.S. economy.


Three big questions for the Fed: How much, when and why? “The most likely takeaway from this week’s Federal Open Markets Committee meeting will be central bank willingness to cut rates as a supplement to the dramatic policy U-turn earlier this year.  The first cut will probably not take place this week but rather at the next FOMC meeting scheduled for July 30-31. It is likely to amount to a 25-basis-point reduction as part an open-ended cycle of rate cutting, with a smaller probability of a 50-basis-point ‘one and done’ approach,” Allianz economic adviser Mohamed A. El-Erian writes at Bloomberg Opinion.

Back in 1975, it a person took nine long years to save up a 20% down payment on a city’s median home by setting aside 5% of the city’s gross median income. “Now it takes 14. But the aggregate numbers make the decrease in access to the real-estate market seem gradual, albeit troubling, and underplay the spikiness of the country. In Los Angeles, it would take 43 years to save up for a down payment. In San Francisco, 40. In San Jose and San Diego, 31. In Seattle and Portland, 27 and 23, respectively,” Alexis Madrigal writes in the Atlantic.

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