While U.S. inflation has reached the Federal Reserve’s 2 percent target for stable growth, the potential drag on the economy from President Trump’s import tariffs may be enough to stall a December interest-rate increase.
A hike at that time would potentially round out the four raises the Federal Reserve’s monetary policy committee had indicated were possible this year — the most in any 12 months since rates were cut to nearly zero during the 2008 financial crisis. The broad and escalating duties imposed by the White House have made tightening monetary policy that fast more complicated, however, with corporate executives, lawmakers, and economists warning that the levies are likely to slow growth.
As a result, the Federal Open Market Committee, is likely to “increase interest rates in September, but pause in December as the implementation of tariffs temporarily cause incoming data to soften,” said Alan Detmeister, an economist with Swiss lender UBS. Committee members themselves noted the danger in their last meeting, according to minutes published earlier in August.
“Most expressed the view that an escalation in international trade disputes was a potentially consequential downside risk,” according to records of the session, and Trump himself has indicated he prefers fewer rate increases.
To be sure, the odds of a fourth hike in December, taking rates to a 2.25 to 2.5 percent, are fluctuating. Trading in interest-rate futures tracked by CME Group indicated a 73 percent chance of an increase then, and economists at both Bank of America and investment bank Morgan Stanley project it will still happen.
Strong data such as the pickup in inflation and unemployment of 3.8 percent that matches a 1969 low have “boosted equity markets by 6.5 percent year-to-date, while news around trade tensions has dragged it down by 3.8 percent,” Anna Zhou, an economist with Charlotte, N.C.-based Bank of America, said in a report. “The negative impact from trade ‘war’ news has eased in recent weeks following the Trump-Junker agreement and U.S.-Mexico deal.”
Trump’s joint news conference in late July with European Commission President Jean-Claude Juncker, in which the two announced an agreement for Europe to buy more U.S. soybeans — easing the impact of trade retaliation from China — and delay automotive tariffs that Trump had previously threatened, quieted some concerns about the White House’s protectionist policies, as did the announcement of a not-yet-detailed pact with Mexico this week.
The trade dispute with China, however, remains an unknown. So far, Trump has imposed duties of 25 percent on $50 billion of imports from the world’s largest economy and threatened them on as much as of $500 billion of goods.
The higher costs resulting from that prompted Ford Motor Co. to cancel plans to import its crossover Focus from China and offer it to U.S. customers, and a variety of American retailers have warned that the duties may curb income in the remainder of the year.
Executives and economists alike, however, suggest the U.S. will pick up any lost momentum in 2019, when Morgan Stanley economist Ellen Zentner predicts the Fed will raise rates only twice, taking them to a range of 3.25 percent to 3.5 percent, before resting.
Rate increases are typically a boon to lenders, who benefit from passing hikes on more quickly to borrowers than to the depositors whose money funds loans.
