Economic Outlook - August 2019
Dr. Alan S. Blinder is a cofounder and Vice Chairman of Promontory Interfinancial Network. He is also the Gordon S. Rentschler Memorial Professor of Economics and Public Affairs at Princeton University.
It was just one of those days. Or maybe a day and a half.
The stock market slumped on Wednesday afternoon as Federal Reserve Chairman Jay Powell spoke. Traders were apparently deeply disappointed that he steered people away from the notion that the Fed’s just-announced, 25-basis-point rate cut was the first of many. A “midcycle adjustment,” he called it, suggesting limited enthusiasm on the committee for further cuts. Two dissents strengthened that belief.
But then on Thursday morning, with no news about the Fed whatsoever, the market gained back most of its losses—after which President Trump threw yet another monkey wrench into the trade mix by announcing more tariffs on China. The net effect of the Fed news thus appears to have been about zero over Wednesday-Thursday, which is just what you’d expect when the market strongly expects 25 basis points and the Fed delivers exactly that. No news is no news.
Yet it was a pretty wild 24 hours for short-term traders. Why? Probably because the Fed’s actions and words created more uncertainty than they resolved. These traders were crestfallen on Wednesday afternoon. But by Thursday morning they had decided that, maybe, they had overdone it. No, the Fed is not embarking on a rate-cutting spree of the sort Donald Trump wants. Too bad. But another 25 basis points in September is likely.
Is it? Market pricing—as of today—says yes. But I wonder. The U.S. economy looks strong, even though the 2017 tax cuts have failed to deliver the investment boom that was promised and the unemployment rate is historically low. The ups and downs of the trade war with China are anybody’s guess—as likely to look better as worse when the FOMC next meets on September 17-18. (You try guessing what Trump will do between now and then.) The eurozone economy is a good bet to be sluggish then—just as it has been for many months. A hard Brexit, with its threat to both the U.K. and the E.U., will probably be cIoser to becoming a reality. And U.S. inflation? Who knows?
Like several FOMC members, but unlike the majority, I didn’t see a strong case for a rate cut on Wednesday. But if you think weakness in Europe and the continuing trade war with China are likely to bring recessionary forces to our shores, more rate cuts make sense. We’ll see.
One final point: The idea that a 25-basis-point rate cut buys you any appreciable “insurance” against a recession is silly. The Fed would need to do at least 100 basis points, and probably a good deal more, to accomplish that. Our central bank is not that worried.