Donald Trump’s protectionism became one of the reasons for the pause in the Fed’s monetary normalization

The derivatives market has increased the probability of the Fed’s rate cut in 2019 from 7% up to 17% in three days; however, the FOMC officials, along with Bloomberg experts, still believe in continuation of the monetary normalization cycle. According to Atlanta Fed president, Raphael Bostic, the Fed can afford to increase the interest rate by 25 bps this year, followed by one more rate hike in 2020. As long as the US economy is running fine. 59% out of almost 300 Bloomberg respondents, businessmen, believe that the interest rate will be higher than the current level of 2.5% in late 2020. Who is right? As usual, economic data will give a clue.

Forecast for the Fed interest rate in late 2020

Source: Bloomberg 

According to 10% of economists, the U.S. should face a recession already in 2019; 42% of them believe that it will occur in 2020, 25%-in 2021; the rest of them suggest a later period or don’t say anything for sure. Fed vice chair Richard Clarida notes that the U.S. economy is in a perfect state, and the chief risks are coming from abroad. A decline in global growth sets the US export back and affects the financial markets that, accordingly, are the main channel to convey the Fed’s monetary policy. The policy-maker has just forgotten to mention that the main reason, pressing down global GDP growth, is Donald Trump’s protectionism. The US president might have been trying to end the Fed’s monetary normalization cycle by boosting import tariffs And he has succeeded, indeed! Even if the former Fed CEO Janet Yellen insists that the US president doesn’t understand the central bank’s mission and he could hardly say what it the goal Fed’s policy, but still, he achieves what he wants.

Now Trump needs the recovery of stock indexes that, according to him, reflect the president's effective work. So, there are needed investors, who would believe in “substantial progress” in the US-China trade talks. And the U.S. president first extends a March 1 deadline, next, he says that the agreement with Xi Jinping would be signed in the near future. And Presto! The stocks are rising all over the world and the S&P 500 is climbing to its three-month highs.

Dynamics of Dow Jones and Shanghai Composite

Source: Wall Street Journal

However, the conflict easing presses down the dollar. Another target of the U.S. president.

It is quite funny with the euro too. The ECB, following its meeting on March 7, may give a surprise, like the LTRO launch and...simultaneous interest-rate hike in September. This decision will support the euro-area banking system, but financial markets will see it as monetary restriction. It may encourage the EUR/USD bulls to go ahead. The major currency pair is still trading close to the middle of figure 13; it is looking forward to the report on the US GDP for Q4, 2018. Investors are unwilling to go ahead, however, the breakout of the resistance at 1.137-1.1375 may inspire them for action.


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