Year of pressure: US Fed struggles to communicate

Slump Asian trade signs of bottoming: Goldman

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WASHINGTON/ HONG KONG

For the first time since the Great Recession a decade ago, the US Federal Reserve is poised to cut interest rates, shoring up America’s defenses as the global economy weakens. It will mark a striking about-face for the central bank, reversing a rate increase announced just seven months ago. And the policy flip comes as the central bank has suffered a number of awkward stumbles in communications, as it has tried to communicate confidence in the economy, while at the same time a readiness to support continued expansion.

Fed officials have had to backtrack and clarify recent statements, and amid President Donald Trump’s blistering, year-long public campaign against Fed Chair Jerome Powell, one central banker seemed to offer himself as an alternative for the leadership position. Meanwhile, although the rate cut this week is almost universally expected, economists disagree on whether the Fed is making the right move. Indeed, cutting rates now could appear highly unusual: The Fed has never done so with unemployment so low.

New York Fed President John Williams, the influential vice chair of the Fed’s monetary policy committee, said this month that acting quickly to cut the key lending rate could “vaccinate” an economy against disease later on. But his office later scrambled to clarify that the comment was referring to the history of monetary policy and was not a prediction of how the Fed would act on July 31.

There are signs that Asia’s export slump is bottoming out. That’s according to Goldman Sachs Group economists who highlight a substantial pick up in exports to the US from Asian economies including Taiwan, Vietnam and India that’s effectively canceling out the fall in shipments from China.

 

Initial shocks from the trade war might be behind us, with Asian exports to China recovering and tech exports catching up with stable non-tech exports, Goldman economists led by Andrew Tilton wrote in a note. Also, a rebound in the Asian trade cycle seems overdue, with Asian exports undershooting trade partners’ activity growth and the current downturn being sustained longer than past cycles.

Chinese and American trade negotiators meet again in Shanghai this week for the first round of meetings between both sides since talks broke down in May. Even if trade tensions escalate, an expected wave of supportive measures from governments and central banks to underpin economic growth will aid the trade recovery, Goldman argues. The Federal Reserve is tipped to cut interest rates this week for the first time in a decade.

For sure, additional US tariffs on Chinese goods would have an impact. Our view is, however, that the escalation would likely be temporary ahead of an eventual trade agreement, and potential damages could be mitigated by ongoing shifts in supply chains, Goldman’s economists wrote.

 

In the event of further escalation in the trade tensions beyond our baseline, Asian trade may undergo another downturn which, if sustained for the coming year, could make the current downcycle the longest since the 1990s.

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