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Powell May Cut Rates due to Trump, but There’s a Catch

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Fed Chair Jerome Powell is widely expected to announce a rate cut at this week’s FOMC policy meeting. While it’s an earnings-heavy week, with companies such as Apple (AAPL) reporting, the Fed could steal the limelight. In its June press release, the Fed said that it would consider “measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international development” in making future rate adjustments. As we noted in the previous articles, while the US economy has shown signs of moderation, things aren’t all that bleak.

International developments

Globally, most central banks have taken a dovish stance amid sagging growth. The European Central Bank hinted at a rate cut last week, and Turkey also announced rate cuts last week. The Australian and Indian central banks have also been cutting rates. Fed Chair Jerome Powell might also consider global dovishness. While the US economy has been reasonably strong, global growth is sagging. Also, amid global rate cuts, if the Fed doesn’t follow suit, it would lead to a stronger US dollar. Earlier this month, Trump tweeted, “China and Europe playing big currency manipulation game and pumping money into their system in order to compete with USA. We should MATCH.”

US-China trade war

A strong US dollar makes imports relatively cheap and blunts some of the effects of Trump’s tariffs. So far, Trump has imposed a 25% tariff on $250 billion worth of Chinese goods. While there’s technically a truce in the US-China trade war, things aren’t looking all that positive. The US delegation is expected to travel to China this week. The in-person talks between the world’s two biggest economies have been on hold since May.

The US-China trade war is among the prominent factors that have hurt global growth. Last week, the IMF lowered its global growth forecast for the fourth time since October 2018. In an apparent reference to Trump’s trade war, the IMF said, “Global growth is sluggish and precarious, but it does not have to be this way because some of this is self-inflicted.” It added, “A major downside risk to the outlook remains an escalation of trade and technology tensions that can significantly disrupt global supply chains.”

Powell may cut rates because of trade war uncertainty

Powell may finally cut rates this week. The uncertainty surrounding Trump’s trade war, the slowdown in global growth led by trade uncertainties, and dovishness from other central banks could be the key drivers of the Fed’s rate cut. While Trump has been asking the Fed to lower rates for some time now, Powell has maintained his posture. However, Powell may oblige Trump with a rate cut.

However, the Fed may lower rates not because Trump wants it but because Trump’s trade war may have necessitated it. Former Fed Chair Janet Yellen has echoed these views. She’s advocated a rate cut amid the global slowdown. According to Yellen, “The global economy has weakened. I think partly it’s weakened because of conflicts over trade and the uncertainty that’s caused for businesses.”

US companies and the trade war

Several US companies have been hit by China’s slowdown and the trade war. Chip makers have especially reacted to news about Huawei. Qualcomm (QCOM), Micron (MU), NVIDIA (NVDA), Broadcom (AVGO), and Intel (INTC) have revenue exposures of 67%, 66%, 53%, 49%, and 42%, respectively, to China, according to a CNBC report. Apple, Qualcomm, Micron, NVIDIA, Broadcom, and Intel have risen 32.7%, 34.9%, 49.6%, 31.5%, 20.5%, and 11.3%, respectively, year-to-date based on their July 26 closing prices.

Would a rate cut help?

The ultimate question is this: will a rate cut help? In our view, it might not really help improve the trade war uncertainty. BlackRock CEO Larry Fink doesn’t see monetary policy as a major driver of the economy. In an interview earlier this month, Fink attributed strong US growth to fiscal measures such as tax cuts and deregulation. Goldman Sachs is also among those who believe a rate cut may not move the needle much for US markets.

Given the expectation of a rate cut, Powell will be the man to watch this week.

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