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.
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.
Issued in the Channel Islands by Cazenove Capital which is part of the Schroders Group and is a trading name of Schroders (C.I.) Limited, licensed and regulated by the Guernsey Financial Services Commission for banking and investment business; and regulated by the Jersey Financial Services Commission. Nothing in this document should be deemed to constitute the provision of financial, investment or other professional advice in any way. Past performance is not a guide to future performance. The value of an investment and the income from it may go down as well as up and investors may not get back the amount originally invested. This document may include forward-looking statements that are based upon our current opinions, expectations and projections. We undertake no obligation to update or revise any forward-looking statements. Actual results could differ materially from those anticipated in the forward-looking statements. All data contained within this document is sourced from Cazenove Capital unless otherwise stated.