Fed futures contracts signaled increased likelihood of an interest rate cut this year after China's plan to raise tariffs on some U.S. goods Monday fueled fears of further slowing of the global economy.
Posting on its website, China's Ministry of Finance said it will raise the duty on about $60 billion of U.S. goods on June 1, in response to the U.S. increased tariffs on $200 billion of Chinese goods on Friday, with more to come if China doesn’t agree to a trade pact within a month.
The fed futures contract implies a 2.095% rate at yearend, down from a 2.15% rate implied last week. The effective fed funds rate was 2.38% Friday. While futures signaled traders' expectations, analysts said conditions aren't yet ripe for the Federal Reserve to ease credit.
"The escalation of tariff disputes and the lack of trade agreement between the U.S. and China has re-introduced 'the fear trade,'” said Greg McBride, chief financial analyst at Bankrate.com. “The headwind to economic growth and uncertainty about how and when it will end increases the appeal of safe haven bonds, and bring Treasury yields lower."
In order for the Fed to cut rates, he said, "We'd need to see notable deterioration in U.S. economic fundamentals or a significant disruption to global financial markets.” And “U.S. economic fundamentals are solid enough and inflation low enough to keep the Fed on the sidelines."
The municipal bond market is “supported by limited supply and strong investor appetite,” Bill Merz, director of fixed income at U.S. Bank Wealth Management, said in a commentary.
With the escalation, Morgan Stanley Research said in a note, although it’s not in the firm's “base case,” at the moment, “risks are skewed towards tariffs on all remaining goods from China.”
Some keys to determine how talks are going will include “timing of the next meeting, and tone on both sides to signal potential escalation,” the note said.
Steve Coleman, spokesman for the Port Authority of New York & New Jersey, said, "While it is too premature to speculate what impact the latest China tariffs will have on global trade, we do not expect to see a major reduction in cargo volume in the Port of New York and New Jersey.”
Not much economic news was released Monday. The Federal Reserve Bank of New York’s April Survey of Consumer Expectations showed median inflation expectations dropped to their lowest levels since late 2017. Inflation expectations fell to 2.6% from 2.8% for a one-year horizon and to 2.7% from 2.9% for a three-year period. “The declines were broad-based across income groups,” the Fed reported.
Elsewhere, former Federal Reserve Bank of New York President William Dudley suggested “Congress should create a fiscal stimulus trigger that would automatically cut taxes and boost spending when the economy entered a slump.” Writing on Bloomberg News, Dudley said if unemployment rose above a certain level, “unemployment benefits could be extended and payroll income taxes cut.”
By employing a trigger, the response would be quicker, “providing much-needed reassurance and reducing the risk of a deep recession. As a result, households and businesses would likely feel less need to tighten their belts aggressively, making downturns less severe. In other words, the mere prospect of greater fiscal stimulus would make the economy more stable.”
Andrew Coen contributed to this report
