Earlier today, we wrote a post titled “What Would It Take For The Fed To Not Cut Again?”, with Goldman providing a stylized answer, although in retrospect, the post should have been titled “What Would It Take For The Fed To Cut Again“, as that is what the market was far more concerned about after yesterday’s hawkish Powell press conference.
In any case, Goldman hinted at the one specific catalyst that could force the Fed to cut more: “We also see risks in the other direction, especially on a significant escalation of tariffs against China.”
To this, we said that “if an acceleration in the trade war with China is what the Fed will need to cut more, it’s pretty clear what that means for the chances of any trade deal between Washington and Beijing, since even Trump now understands that if he keeps escalating trade war with China, Powell will have no choice but to eventually cut to 0% (and lower).”
Just a few hours later, we were proven right in suggesting that an escalation in the trade war is inevitable and imminent when Trump tweeted that he would hike tariffs on $300BN in Chinese imports to 10% starting September 1, ending the tentative ceasefire with Beijing with a bang, and sending risk prices sharply lower.
And yes, while Trump did suffer a modest drop in his favorite polling indicator – i.e., the stock market – which “cratered” as much as 1.5% below its all time high – far more importantly Trump also called Powell’s bluff, and effectively forced the Fed to prepare for more rate cuts as the trade war with China – which Powell explicitly highlighted as a condition that would result in more easing – is set to escalate further.
Late today, Bloomberg confirmed as much noting that traders “fixated on a timeline in which Powell seems to suggest cooling trade tensions reduced the need for future rate reductions — and a day later Trump revs the tensions back up”, just as we said he would. “It fits the pattern of a president bent on getting the central bank to submit, many thought”, the Bloomberg authors concluded.
“Powell was very careful to say that he was looking at three things, one of which was global growth and the extent to which that is risked by trade tensions,” said Ellen Hazen, senior vice president and portfolio manager for F.L. Putnam, which has $2.2 billion under management. “It’s very logical to conclude that if trade tensions increase, given what Powell said, that would be something he would look at to evaluate a further cut.”
Precisely, hence our prediction first thing this morning.
As for the best assessment of what happened in the past 48 hours, in which one can say that Trump put Powell in a figurative chokehold, it came from Federated Investors fund manager Steve Chiavarone who saw the interaction between Trump and Powell as a “brilliant ploy”:
“I don’t think it’s a coincidence the announcement came today after the rate cut yesterday. It’s possible that while most folks were playing checkers, the president was playing three-dimensional chess here. And if he is, kudos to him.”
Kudos indeed, because if it was Trump’s intention to force the Fed to find itself behind the curve on easing more – at least from the perception of the market – he succeeded. As Goldman – which earlier today stepped up to lead the hawkish Fed #resistance effort against gratuitous Fed rate cuts, saying it “continues to see little need” for a September rate cut – wrote after the close “today’s announcement increases the likelihood of a rate cut at the September FOMC meeting, in our view. We now see a 70% chance of a 25bp cut, a 10% chance of a 50bp cut, and a 20% chance of no policy change in September (vs. 55%, 5%, and 40% previously), and we now see a 90% chance of at least one additional cut (beyond that announced on Wednesday) at some point this year (vs. 80% previously).” Additionally, while Goldman has not yet changed its baseline forecast that the Fed will cut by a total of 50bp, “the announcement tilts the risks toward deeper cuts.”
Finally, while Goldman expects a 70% chance of a rate cut in September, the market – after yesterday’s fiasco – is now convinced that the Fed is again behind the curve, with a September rate cut a lock, with odds surging above 90%…
… and is also convinced that there will be 2 more cuts before the end of the year.
In short, while one can debate if Trump is playing 3D chess, in under 24 hours he managed to force Powell to face a very unpleasant choice: cut at least 2 more times or watch as stocks plunge in a repeat of Q4 2018.
And so, once again Trump is about to get his way.