The Fed did what everyone knew it would do – markets reacted as everyone expected
If one was given a dollar for every time an economic pundit feigned shock at the Federal Reserve’s very modest rate hike and Fed Chairman Jerome Powell’s more cautious outlook for 2019, one would have enough money to singularly reverse the deeply negative trends on the US stock market. The fact of the matter is that the Fed did exactly what anyone following recent US economic trends could have predicted it would do.
While some have framed the Federal Reserve’s modest quarter point hike in the benchmark overnight lending rate as an act done in defiance of Donald Trump’s pro-growth ambitions which naturally entail a slashing of the modest interest rate levels one has seen throughout the incremental hikes of 2018, Powell rightly concluded that although growth has slowed in the final quarter of 2018, cutting rates or leaving them standing still could produce negatively inflationary trends in the near future. Likewise, as it is widely thought that US tech stocks in particular have been wildly overheated throughout the year, balancing a possible tech bubble about to burst with a more robust monetary policy than Trump would like, also adheres to the speculative version of common sense.
As predicted, the stock markets reacted negatively to the Fed’s rate hike and more mild assessment of economic growth in 2019. So far – so foreseeable.
The trade war is a new X-factor
For all the grim faces on Wall Street during Powell’s announcement, it is helpful to remember that the December rate hike is the fourth time in 2018 that the Fed raised rates and yet through much of 2018, markets continued their bullish trends. While it is true that some of the lustre from Trump’s tax cuts has worn off, the trade war is the major X-factor behind downward trends in the US stock markets that began in the autumn of 2018 with October being a particularly bad month for both industrial and tech stocks. So far December looks to end in bear territory.
It was in October where the realities of the trade war began to sink in after a summer where many manufacturers were still using imported Chinese goods in their products that arrived in the US before the onset of tariffs. As many companies stockpiled Chinese goods needed for their products in anticipation of the full onset of the trade war, the delayed onset of economic misfortune can be easily understood. While October was a worrying month for stocks and shares, in November came the threat of major industrial job loses as General Motors announced the closure of four major US plants while Ford has threatened to take similar moves.
While the speculative trends regarding October’s market dive and the November surprise from General Motors have frightened some investors, they have not overly excited the Federal Reserve as the Fed’s role is to plan for the medium rather than the short term. Even so, experienced Fed watchers realise that moving forward, the trajectory of the trade war which depends almost entirely on Donald Trump’s infamous volatility regarding all things China, is going to be much more difficult to forecast than the other variables that both investors and the Fed consider in making their respective decisions.
The trade war will make or break the US economy in 2019
With no surprises coming from the Fed and with Jerome Powell hinting at a mild downturn in 2019 while former Congressman Dr. Ron Paul has foretasted a possible depression, the fact of the matter is that no one other than Donald Trump’s Twitter account is forecasting a good 2019. And yet it is Donald Trump who has the greatest ability to moderate the predicted downturns of 2019.
There is no doubt that the overheated stocks of early and mid 2018 were inevitable headed towards a period of correction and yet by cutting US industries off from the Chinese products they need to effectively and competitively produce their goods, by cutting US producers off from the substantial Chinese market and by levelling a regressive tax (tariffs) on the goods consumed by Americans which will hit the poor and the working class the hardest, the trade war could be the difference between the mild cooling off Powell has predicted and the 1929 style disaster that Ron Paul has foreseen.
Ending the trade war is 2019’s economic insurance policy
While December has seen one of the worst Christmas seasons on Wall Street in decades, the fact is that this has happened while only a glimpse of the trade war’s growth killing potential has been fully revealed. In other words, the bad news that the trade war has caused in the autumn and early winter of 2018 is the preview of coming attractions rather than the main feature.
Rather than blame the conservative anti-inflation minded Powell for doing at the Federal Reserve what many in his position would have done, Trump ought to take responsibility for the damages that his trade war has inflicted. Indeed, the trade war has caused volatility in Asian markets throughout the year and now this volatility has spread to European markets. It doesn’t take a genius to see that this proverbial market plague will next spread to US markets.
Because of this, the main thing Trump can do to ameliorate the situation is to seal his much discussed trade deal with China as soon as possible. China is opening its markets to the world, American businesses are angry about missing out on this golden opportunity and a stroke of Trump’s pen could change all this by ending the trade war, accepting that China wants to buy more US goods than ever before while Trump also must accept that US businesses need Chinese imports, US farmers and industrial producers need China’s vast market and US consumers are being hit with inflation by stealth due to the regressive taxation that tariffs represent. If Trump were to accept these factors as the motivating impetus for an urgent end to the trade war, 2019 could in fact be resuscitated before bad trends solidify.
Because of other factors including US tech stocks which still must further correct their 2018 overheating, likely rises in unemployment and multiple dubious trends in Europe – ending the trade war will not correct all of America’s problems in 2019. However, ending the trade war could be the difference between the US comfortably weathering a very moderate storm vs. being at the epicentre of a recession.