Trade Risks Prompt Predictions for Fed Rate Cuts



Nick Timiraos | Wall Street Journal

President Trump has pursued tariffs and wants the Federal Reserve to cut rates. Economists are projecting that uncertainty created by the administration’s actions on the former will prompt the Fed to deliver the latter later this year.

So far, most forecasters don’t see the Fed taking action at its June 18-19 meeting, in part because they expect the central bank will want to see if global leaders can ease trade tensions, particularly at the G-20 summit in Japan later this month.

Economists at Barclays now project the Fed will cut rates by 0.5 percentage point in September and by another 0.25 percentage point in December. Previously, the bank expected the Fed would be on hold through 2020.

Similarly, economists at JPMorgan Chase are projecting a quarter-percentage-point cut in both September and December, even if the U.S. avoids a lasting trade fight with Mexico. Until two weeks ago, the bank projected the Fed’s next move would be to raise rates, though not until late next year.

If trade tensions persist, “we could end up in a recession in three quarters,” said Morgan Stanley chief economist Chetan Ahya in a report Sunday. Recent conversations with investors “have reinforced the sense that markets are underestimating the impact of trade tensions.”

Declining government bond yields indicate “the Fed is too tight,” said Marc Sumerlin of Evenflow Macro, a policy analysis firm, in a note to clients last Thursday. He now expects the Fed to cut rates in July, moving forward his earlier projection of a rate cut in September.

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