President Donald Trump’s decision to impose tariffs on $200 billion of Chinese goods won’t deter the Federal Reserve from raising its benchmark short-term rate next week. What it means for December and next year is more uncertain.
Seth Carpenter, chief U.S. economist at UBS, thinks the Fed will “skip” a rate hike in December because there will be ample evidence the trade dispute is hurting the economy in the data.
Carpenter said he expects a loss of jobs from the trade fight to be evident in the November unemployment report, released on Dec. 7. There is also likely to be a rise in jobless claims, a hit in retail sales and drop in capital goods orders and shipments, he said.
If only one data point is weak, the Fed might chalk it up to noise. But with the weakness across different reports, it will push the Fed to the sidelines, Carpenter said.
“It will be enough for the Fed to ask ‘what is going on’, he said.
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At the last Fed interest-rate committee meeting in late July, Fed officials saw an escalation in trade disputes as a major downside risk and listed a litany of ways that the economy might be hurt.
“Participants observed that if a large scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment,” and the possibility of a hit to the purchasing power of households, a reduction in productivity and a disruption in supply chains, according to minutes of the meeting released last month.
Fed policymakers will meet again in a two-day meeting ending Sept. 26. The market is pricing in over a 90% chance of a quarter-point rate hike.
The Fed has penciled in four moves this year. Given the central bank has been raising interest rates at a pace of once-per-quarter, the Fed is next expected to hike at the meeting ending Dec. 19.
Other economists do not think the Fed will skip December.
“I don’t think [the new trade tariffs] stop the Fed from continuing to tighten,” said Jim O’Sullivan, chief U.S. economist at High Frequency Economics.
The tariffs “are probably not enough to cause the economy to weaken sharply. Growth looks more than strong enough to continue to bring the unemployment rate down,” he said.
Fed Chairman Jerome Powell will hold a press conference on Sept. 26 and is likely to tell reporters the Fed is watching the data closely for signs of distress, O’Sullivan said.
Lewis Alexander, chief U.S. economist at Nomura, said the impact of the trade tariffs on the outlook “is a 2019 thing.”
“The issues are what tariffs do to business confidence and investment and these play out over months,” Alexander said. ”It will not have a major impact on what they do this year.,” he added.
Recent Fed speeches, especially by Chicago Fed President Charles Evans and Fed Governor Lael Brainard, have been robust defenses of the Fed’s forecast for four rate hikes this year.
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“They are pretty comfortable sending that signal for now,” Alexander said.
And it’s just too early to say exactly what the effect the tariffs will have on the Fed in 2019, he added. The central bank has penciled in three hikes.
The tariffs will go into effect on Sept. 24 will start at 10% and then climb to 25% on Jan. 1.
Carpenter said his team still had to crunch the numbers but the staggered tariffs also raised questions about whether the Fed would raise interest rates in March 2019.
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