While the Fed had clearly raised its economic outlook since the December FOMC meeting and into 2018 as a result of recent strong wage inflation prints, that may soon change, and not only because the global economic impulse is suddenly slowing fast as shown by the recent drop in the global economic surprise index…
… but mostly as a result of a potential economic slowdown resulting from Trump trade tariffs.
That was the take home message from Atlanta Fed’s (voting) president Raphael Bostic, who suggested that Trump’s trade war could offset any positive boost from the Trump fiscal stimulus.
Speaking to reporters in Florida, Bostic said that “some of the developments with the trade policy has introduced some uncertainty as to how the economy is going to perform, so I am really taking a wait-and-see attitude,’’ Asked whether he was deciding between two or three increases, or three or four, he said, “Everything is on the table.”
His dovish comments followed unexpectedly hawkish comments from none other than one of the Fed biggest heretofore dove, Lael Brainard:
“We would take into account developments if they proved to be material to the outlook,” Brainard told a dinner audience in New York. “It’s early to tell what the broader implications could be, so I see it as an uncertainty, but not something that would materially change my outlook, today.”
Bostic, who in December had favored raising rates just twice this year – making him one of the most dovish members of the rate-setting Federal Open Market Committee – shifted his projection to three moves. That upgrade was prompted by a $1.5 trillion tax-cut package signed by Trump in December and subsequent government spending agreed by lawmakers. However, he cautioned, a trade war might change the economic picture.
The Atlanta Fed president did say the Fed would have to wait and see what the economic impact might be if tariffs are imposed. He said that protectionism is a negative for the US economy, that “trade wars are not easy and winnable”, and that protectionist policies add uncertainties. He added, “There has not actually been anything done yet.”
“We don’t know which products are going to be pulled into this tariff regime,’’ Bostic said. “Europe has signaled it would hit a whole host of other products that are not aluminum or steel, so there is just no real certainty as to which products are going to be pulled into this. Anyone engaged in any international trade spaces has got to have some concern that they could be part of the story here and be at risk of a changing cost reality.’’
Adding to the dovish sentiment, he also said that he has not seen a burst of productivity that would boost overall
As Bloomberg notes, so far, the Fed has penciled in three moves this year, a number that will be revised later this month. New Fed Chair Powell told Congress last week that headwinds to U.S. growth had become tailwinds, prompting investors to up their bets that he’ll move four times in 2018. But that outlook could be thwarted if U.S. trade partners retaliate against sweeping tariffs on steel and aluminum planned by President Donald Trump.
In a comment published this morning, Oxford Economics said that:
“based on this and previous comments, we look for Bostic to approach future rate hikes with caution. In prior appearances he suggested that he was watching for inflation to pick up to a more sustainable pace nearer the 2% objective, but also that moderate growth was strengthening the labor market further.”
More ominously for the bulls, Bostic said that trade concerns could well result in lower stock prices, which he described as “through the roof’’ since the election, as investors adjust their profit expectations.
He also warned that “the increase has not been commensurate with an increase in profits or any of those sorts of things,’’ he said, and cautioned that “if the response happens because there is a trade disruption and profitability for a host of sectors changes, then we could see a pretty significant move.’’
Finally, he also commented on Cohn’s resignation, saying it adds to the uncertainty: “I would fully expect it to have an impact,’’ he said. “If you look at the economic team, Cohn played a particular role and connected with a segment of the marketplace that is quite important and quite visible.”
In retrospect, by launching a trade war, Trump may have stumbled on the solution to prolonging the stock rally which will keep his beloved S&P at or near all time highs: after all, the mere hint that Bostic was considering reducing the number of rate hikes due to Trump’s action, sent stocks to session highs. However, judging by the prompt snapback, more Fed president will need to echo Bostic’ assessment that trade wars is just what the bullish market doctor ordered.