SNAPSHOT2 min read

Trump targets Mexico, hits the Fed

We cannot be sure if Trump’s Mexican tariffs are just part of his bargaining strategy, but it may get him the Fed rate cut he wants.

05/06/2019
Mexico

Authors

Keith Wade
Chief Economist & Strategist

Interest rate expectations have moved significantly over the past week following President Trump’s tweet that he was putting tariffs on Mexico. The market is now pricing in nearly three rate cuts of a quarter point each this year from the US Federal Reserve (Fed). Only a week ago the market was pricing in just one.

Our view has been that the Fed would ease, but not until next year when there would be more evidence of a slowdown in activity.

Alongside the stalling in the US-China talks, the latest tariffs represent a ratcheting up of trade tensions and would hit growth, not just in Mexico but also in the US. Macro-models suggest US GDP would be some 0.7 percentage points weaker in 2020 than otherwise. This would put the US in recession on our forecasts.

As always with President Trump one cannot be certain whether his latest move is part of a bargaining strategy and that ultimately he will not follow through. The problem for the Fed is that the market seems to have decided he means it. Consequently it is more difficult for the central bank to push back without triggering considerable financial volatility.

Looking at the impact on the economy, higher tariffs hit trade but much of the near-term effect is likely to be through weaker confidence and falling equity markets, areas the Fed can influence.

Chair Jerome Powell offered markets some reassurance yesterday when he said the Fed was monitoring the implications of the trade negotiations and would act appropriately to sustain the expansion. Meanwhile, there are signs that the economy is cooling  and inflation remains low so there is little to stop the Fed making a precautionary “insurance” cut. This could come in late July but more likely September.

It remains to be seen whether Trump’s threats on tariffs achieve a resolution of the immigration crisis with Mexico, but it may get him the rate cut he wanted from the Fed.

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Authors

Keith Wade
Chief Economist & Strategist

Topics

Cazenove Capital is a trading name of Schroders (C.I.) Ltd which is licensed under the Banking Supervision (Bailiwick of Guernsey) Law 2020 and the Protection of Investors (Bailiwick of Guernsey) Law 2020, as amended in the conduct of banking and investment business. Registered address at Regency Court, Glategny Esplanade, St. Peter Port, Guernsey GY1 3UF, (No.24546) . Schroders (C.I.) Limited, Jersey Branch is regulated by the Jersey Financial Services Commission in the conduct of investment business. Registered address at IFC1, Esplanade, St Helier, Jersey, JE2 3BX, (No.31076).

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