AFP PHOTO via Getty Images/Bryan R. Smith
- While the Federal Reserve recently paused its three-year campaign hiking interest rates, officials have fallen short of signaling that lower borrowing costs are coming.
- But as the trade war between the US and China escalates, market expectations for an interest-rate cut have been ticking higher.
- More than three-quarters of investors forecast a rate cut by the end of the year, according to CME Group’s FedWatch tool.
An increasing number of market watchers appear to think the escalating trade war between Washington and Beijing poses risks that could upend growth in the US economy.
While the Federal Reserve this year paused its three-year campaign hiking interest rates, officials have fallen short of signaling that lower borrowing costs are coming.
Yet with underlying signs of slowing, some have seen hopes grow for lower borrowing costs. The recent escalation in the US-China trade war has only bolstered expectations, particularly in financial markets.
“The econ data does not support a rate cut, but worsening market conditions could push that direction if they continue to deteriorate,” said Luke Tilley, the chief economist at Wilmington Trust who previously worked at the Philadelphia Fed.
More than three-quarters of investors forecast a rate cut by the end of the year, according to CME Group’s FedWatch tool. That number has increased steadily over the past month, especially after trade negotiations in Washington last week ended without progress.
President Donald Trump seized on his escalating trade war on Tuesday, arguing that the US would gain leverage if officials lowered interest rates. The president has stepped up pressure on the Fed, which is meant to operate independent from political interests, ahead of the 2020 elections.
“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,” he wrote on Twitter. “If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!”
Others are less convinced that lower borrowing costs are ahead. While Fed officials have expressed concerns about trade uncertainty and soft inflation, key parts of the economy have held up stronger than expected in recent months.
“The current level of inflation may perplex central bankers and financial market participants, but in the context of a growing economy and job gains, it doesn’t demand a Fed policy response in my view,” the Kansas City Fed’s president, Esther George, said Wednesday in Minnesota.
In a Wall Street Journal survey out last week, economists were split down the middle on whether the next rate adjustment would be a hike or a cut.
“The Fed is unlikely to do anything before it sees the hit showing up in the numbers,” said Kenneth Kuttner, a former Fed economist who is now a professor at Williams College. “And even if we do see some near-term turbulence, the FOMC will probably want to wait until it had evidence that a deal was unlikely in the foreseeable future, and the adverse effects would be persistent.”
