- Today’s minutes will reiterate Fed’s guidance for unchanged policy but the outlook depends heavily on trade talks
- US/China trade talks bog down on tariff rollback
- Washington moves to avert government shutdown as House passes Dec 20 CR
Today’s minutes will reiterate Fed’s guidance for unchanged policy but the outlook depends heavily on trade talks — Today’s release of the minutes from the last FOMC meeting on Oct 29-30 is expected to underscore that meeting’s message that the Fed, after its Oct 30 rate cut, now believes that monetary policy is in a “good place” and that no more rate cuts are therefore necessary unless the outlook substantially deteriorates.
While the Fed doesn’t think it will have to cut rates again, the market doesn’t agree since the federal funds futures market is discounting 1.5 more rate cuts by the end of next year. Specifically, the Dec 2020 federal funds futures contract yesterday closed at a yield of 1.24%, which represents expectations for a -38.5 bp easing (1.5 rate cuts) from the current fed funds target midpoint of 1.625%.
The markets are not fully expecting another Fed rate cut, however, until June 2020. In fact, the market is discounting only a negligible 4% chance of a rate cut at the next FOMC meeting in three weeks on Dec 10-11.
While the Fed is not anticipating another rate cut, the fact remains that monetary policy is heavily dependent on incoming data and that a rate cut could quickly become necessary if the situation suddenly deteriorates. The situation could in fact deteriorate very quickly, for example, if the phase-one US/Chinese trade deal suddenly falls apart. In that case, President Trump would undoubtedly proceed with his current plan for a 15% tariff on Dec 15 on the last $160 billion of Chinese goods and might announce another round of higher tariffs. President Trump said yesterday that if there is no phase-one trade deal, “I’ll just raise the tariffs even higher.”
The bottom line is that the Fed can say it’s done easing, but the reality is that Fed policy remains heavily on the outcome of the US/Chinese trade talks.
US/China trade talks bog down on tariff rollback — Bloomberg on Tuesday reported in more granular detail on the status of tariff rollbacks in the US/Chinese trade talks. Bloomberg reported that U.S. negotiators are willing, as part of a phase-one trade deal, to scrap the upcoming Dec 15 tariff, roll back the Sep 1 tariff on $110 billion of Chinese goods, and set up a process for rolling back the 25% tariff on the initial $250 billion batch of Chinese goods. It remains unclear whether President Trump will go along with that plan since Mr. Trump has said that he has not yet agreed to any tariff rollback, making it unclear whether he approves of the offers being discussed by his negotiators.
Bloomberg reported that China is trying to get the U.S. to agree to roll back as much as 60% of the tariffs on the initial batch of $250 billion of Chinese goods based on Mr. Trump’s statement that a phase-one trade deal will cover about 60% of his goals for an ultimate trade deal. The Bloomberg article said that the U.S. side is discussing only a 35% roll-back.
While U.S. and Chinese negotiators are engaging in highly detailed discussions about what tariffs to roll back, there is no assurance that Mr. Trump will sign off on any rollback, especially not a rollback of the tariff on the original $250 billion of Chinese goods. Once tariffs are rolled back, Mr. Trump would have much less leverage for pressuring China during phase-two trade negotiations.
Based on the record high in the U.S. stock market seen as recently as yesterday, the markets still seem to be very confident that the U.S. and China will in fact reach a phase-one trade agreement within a matter of weeks. However, the talks are dragging on with no end in sight. The only real deadline for a deal at this point is President Trump’s plan to impose a 15% tariff on the last $160 billion of Chinese goods on December 15, and even that tariff date could be delayed.
The markets have displayed a large amount of patience thus far with the trade talks. However, the market’s patience could start to wear thin if it appears there will be no agreement by Dec 15.
Washington moves to avert government shutdown as House passes Dec 20 CR – The House yesterday approved a new continuing resolution to fund the government through Dec 20. Senate Majority leader McConnell has already signaled that the Senate will approve the CR and that he expects President Trump to sign the CR. A new CR would avert a U.S. government shutdown that would otherwise occur this Friday when the current CR expires Thursday night.
Even if a new CR gets done this week, Congressional leaders do not appear to be particularly optimistic about getting an omnibus spending deal done by what would be the new deadline of Dec 20. Talk is already emerging that another CR may be necessary to get Congress into early 2020 since there is probably too little time to get a final spending deal done by Dec 20. Congressional leaders and the White House remain at odds mainly over President Trump’s demand for $9 billion in wall funding.
The markets are not particularly worried about Washington’s problems in getting a spending deal done for the remainder of the fiscal year since a deal is likely to get done eventually. The markets by now have seen enough U.S. government shutdowns that the threat of a shutdown no longer causes much reaction in the markets. By contrast, the markets do get worried about the debt ceiling and the threat of a Treasury default. However, the debt ceiling is not currently a problem since the debt ceiling has been suspended until July 2021, which is six months into the next presidential term.
