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Federal Reserve Minutes Show Officials Troubled by Trump Trade War in July

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Federal Reserve officials saw the economy as “resilient” in July, even as they voted to cut interest rates for the first time in more than a decade based on worries about the possible impact on business confidence from President Donald Trump’s trade war with China, minutes released Wednesday showed.

“Participants generally saw uncertainty surrounding trade policy and concerns about global growth as continuing to weigh on business confidence and firms’ capital expenditure plans,” according to the minutes from the July 30-31 meeting.

The Fed’s monetary-policy committee, officially known as the Federal Open Market Committee, voted 8-2 at the two-day session to cut the benchmark U.S. interest rate by 0.25 percentage point to a range between 2% and 2.25%.

Despite data showing that the economy is growing at a respectable pace above 2%, the Fed cited gnawing concerns that a slowdown in foreign countries could spill over to the domestic economy, especially if Trump raised the stakes in his trade dispute with China.

The day after the Fed meeting, Trump threatened to impose additional tariffs on Chinese imports, and tensions have since grown as China allowed its currency to devalue past a seven-yuan-per-dollar exchange rate, previously seen as a level that the Asian country’s officials wouldn’t tolerate. The Trump administration then labeled China as a “currency manipulator.”

The developments on trade sent stocks reeling. Last week, a classic sign of a looming recession emerged from the bond market, with yields on 10-year U.S. Treasuries falling below those on two-year notes. Usually, the 10-year yields are higher because investors demand extra compensation to hold the bonds for a longer period of time.

Indeed, so much has happened in global markets since the rate cut that the minutes from the meeting — held just three weeks ago — read like a “time capsule,” said Michael Reynolds, investment strategy officer at the money manager Glenmede, which administers the Pew Memorial Trust.

During a press conference after the July 31 rate-cut announcement, Fed Chairman Jerome Powell sent stocks plunging by characterizing the rate cut as a “midcycle adjustment,” an indication that further rate cuts weren’t a given.  And indeed, Wednesday’s minutes show that the phrase was carefully chosen because officials wanted to avoid “any appearance of following a preset course.”

But Trump’s ratcheting up of the trade war with China the following day might have radically changed the Fed’s calculus, according to Reynolds.

“It was almost like Trump was waiting for the Fed to finish up, and then he said, ‘OK, take this,'” Reynolds said in a phone interview. “Now we have a much bigger risk on the profile.”

The minutes confirm a heightened level of disagreement among the Fed officials at the closed-door meeting.

The central bank previously had announced that Esther George, president of the Fed’s Kansas City branch, and Eric Rosengren, who heads the Boston Fed, dissented from the rate cut, instead voting to keep interest rates at their current level. But according to the minutes, “a couple” of other unnamed participants at the meeting had conversely advocated for a deeper cut of 0.5 percentage points rather than the 0.25 points the majority enacted.

And at least one central banker worried aloud that a rate cut could create bubbles in prices for financial assets like stocks and bonds — a dynamic that could lead to a new financial crisis if prices suddenly reversed. “One member also noted that a further easing in policy at a time when the economy is very strong and asset prices are elevated could have adverse implications for financial stability,” the minutes said.

Many investors are already looking ahead to a speech that Powell is scheduled to give on Friday at a national-park building near Jackson Hole, Wyo. And trading in Chicago futures markets shows that most investors expect the Fed to cut rates two to three more times this year.

“A lot of people are looking for more forward guidance,” Reynolds said. “There’s large expectation for Powell to wink at the idea that there’s another rate cut coming [or] dig in his heels that this is a ‘mid-cycle adjustment.'”