If there’s an upside for the White House in May’s lackluster employment growth, it’s this: the Federal Reserve is far more likely to grant the interest-rate cut President Trump has been advocating for months.
The odds of a 25 basis-point reduction in short-term rates this month nearly doubled on Friday, based on trading in rate futures, after data from the U.S. Labor Department showed employers added just 75,000 jobs last month.
Less than half the average prediction of 182,500 from economists, the number offers a worrisome indicator as Trump broadens a sprawling trade war with new tariffs on Mexico and China. Economists, business executives, and lawmakers have all warned that the duties, which Trump says are necessary to achieve U.S. policy goals, risk undercutting U.S. economic growth buoyed by GOP-led tax cuts in late 2017.
“This is a game-changer for the Fed going forward,” said Joseph Song, an economist with Charlotte, N.C.-based Bank of America, which now predicts two interest-rate cuts in the second half of this year and a third in 2020. Reductions of 25 basis points each time would take short-term rates to a range of 1.5%-1.75%.
Growth is “clearly starting to slow,” Song told the Washington Examiner, “and this is well before any additional tariffs go on. If and when those tariffs go into effect, it could be leading into a growth recession in the coming months.
Federal Reserve Chairman Jerome Powell has suggested the central bank is open to cutting rates, reversing its outlook late last year, if the economy begins to slow due to trade conflicts. Already, the Fed has begun to taper the slow wind-down of a balance sheet that swelled to $4.5 trillion through quantitative easing to buoy the economy after the financial crisis.
“There’s no doubt a slowdown is under way. The question is, does it foreshadow a downturn?” said Mark Hamrick, senior economic analyst for Bankrate.com.
“Uncertainty has been injected into the environment by the Trump administration, which we are led to believe was done because of the best of intentions,” he added. “President Trump absolutely unleashed animal spirits in a positive way at the early part of the administration, and now that’s been turned upside down.”
U.S. financial markets surged during Trump’s first year in office, with the Dow Jones Industrial Average climbing 25% as investors bet that Trump and a Republican-controlled Congress would loosen regulations from the Obama era and reduce taxes.
When that paid off with a GOP-led tax bill that reduced the top corporate rate to 21% from 35%, major indexes touched new records before retreating as Trump set tariffs on metal and aluminum and imposed stiff duties on Chinese imports.
In May alone, the Dow Jones fell as much 7% from this year’s high of 26,656 when the president said he would more than double levies on $200 billion of Chinese goods to 25% after trade negotiators reached an impasse, then followed up with a plan to tack comparable duties onto Mexican goods unless the country helped curb illegal immigration into the U.S.
Trump nonetheless remains confident that his tactics will pay off. “China wants to make a deal badly,” he told reporters on Thursday. “And I think Mexico wants to make a deal badly.”
In the interim, however, the Fed will probably have to reduce rates to insulate the U.S. economy, said Michael Gapen, an economist with British lender Barclays PLC, which predicts rates will drop by 75 basis points before the end of December. That might alleviate some of the tension in Trump’s relationship with the Fed chairman he hand-picked to succeed Janet Yellen.
Powell fell from favor less than a year after his 2018 appointment when the president blamed December stock-market volatility on the central bank’s four rate hikes within a 12-month period.
Trump, who was told then that he lacked the power to fire Powell without cause, has alternately berated and pushed the Fed since December, noting before the monetary policy committee’s May meeting that the U.S. economic growth buoying his reelection bid would be even stronger if the central bank would only lower interest rates.
