On September 6, chair of the US Federal Reserve Jerome Hayden “Jay” Powell attended an event at the University of Zurich. In the event, he said the uncertainty around trade policy is one of the major factors behind the global slowdown. Since H2 2018, Germany, China, and other European economies have been slowing gradually, according to Powell. Notably, in June 2018, President Donald Trump imposed tariffs on Chinese goods. China retaliated in turn. The escalation in the US-China trade war has significantly contributed to uncertainty in global trade policy.
Last quarter, Germany’s GDP (gross domestic product) growth rate contracted 0.1% sequentially. In 2018, China’s GDP growth rate slowed to 6.6%, the lowest since 1990. According to Powell, trade policy uncertainty has negatively impacted business investment decisions.
Stocks impacted by trade uncertainty
US chipmakers Intel Corporation (INTC), Qualcomm (QCOM), and Micron Technologies (MU) have been impacted by changes in the US trade policy. Moreover, Apple (AAPL) derived around 17% of its total revenue from greater China. On a year-to-date basis, Intel, Qualcomm, Micron, and Apple have risen 8.5%, 38.5 %, 54.3%, and 35.2%, respectively.
Powell doesn’t expect a recession
Powell said that the US economy “is in a good place.” This year marks the 11th year of economic expansion for the US. He expects “a favorable outlook” for the economy. Moreover, Powell expects a moderate growth rate, strong labor market, and an inflation of nearly 2% for the future. According to the Fed governor, they don’t expect any recession nor they do forecast. The US unemployment rate for August stood at 3.7%, near to its 49-year low. He expects a GDP expansion rate between 2% and 2.5% for this year. Powell continued to say that consumer spending will drive the economy.
Last month, the yield curve got inverted. The inversion of the yield curve has been a good indicator of a recession in the past. As recession fears rise, the S&P 500 Index (SPY) lost 1.8% in August, the second-worst month for the equity index this year. The Nasdaq 100 Index (QQQ) lost 2% in August as well. The price of gold rose by 6.5% during this period. In August, the US-China trade war had continued to escalate.
What’s behind lower interest rates?
In Germany and Japan interest rates are negative. Isreal is also on the verge of joining the negative interest rates club. If the Fed keeps reducing the interest rate by a quarter percent, by 2021 the US economy might face a similar problem. In the upcoming FOMC (Federal Open Market Committee) meeting on September 18, there is a 91.2% chance that there will be another quarter percent reduction in the interest rates.
Powell said the aging population is one of the main reasons for low-interest rates. He cited that the older population “leads to higher appetite for safe assets and more savings relative to investment.” The aging population also reduces productivity and growth. Alan Greenspan, a former Federal Reserve chairman, also emphasized the adverse impact of the aging population on the US economy.