Two Major Banks See Fed Rate Cuts By September – If Not Sooner

At this juncture, it seems like a stretch to suggest that Trump’s tariff strategy is just another manifestation of the “crazy like a fox” dynamic.

You’d be hard pressed to find anyone on Friday willing to defend the decision to slap sweeping tariffs on Mexico in order to try and bully the country into instituting a draconian crackdown on migrants making their way north to the US border.

CNBC dug up Peter Navarro, who, unlike Bob Lighthizer, was willing to defend the administration’s latest protectionist broadside. Peter spewed three solid minutes of falsehoods, exaggerations and, in some instances, outright lies. Here’s the (painful) video:

If you wanted to make a joke about Trump playing 3-D chess, you could sarcastically suggest the White House is intentionally starting an economic cold war with China and deliberately deep-sixing the USMCA in an effort to force the Fed to cut rates.

Again, that’s not what’s going on here, but it’s funny to picture the wheels turning in Trump’s “very large brain” as he ponders what could force Jerome Powell to throw in the towel and get on board with the idea of rate cuts.

On Thursday, Vice Chair Clarida appeared to open the door to easing, noting that the Fed would step in if it became apparent that serious risks to the US economy were materializing. You might well suggest that 25% tariffs on all imports from Mexico (that’s the worst-case scenario) would constitute just such a risk.

“It seems lost on the White House that the only losers in a tariff on Mexico are Americans via higher import costs”, an incredulous David Rosenberg tweeted on Friday, adding that “this isn’t China where production is going to be relocated to Vietnam”. “The only loser from this is the USA”, David continued, before asking if Trump is “trying to lose the 2020 election?”

Who knows, maybe he is. Maybe that’s the 3-D chess. Maybe Trump has finally had enough of the job he never expected to get in the first place.

I digress. Getting back to the Fed, JPMorgan’s Michael Feroli on Friday said Powell and co. are likely to cut rates this year, validating market pricing and cementing the monumental dovish shift that STIR traders begun to price in Q4.

“Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response”, Feroli said Friday. “Accordingly, we now look for two 25 basis point reductions, in September and December.”

Not to be outdone, Barclays Michael Gapen jumped on the bandwagon too.

After noting the recent escalations between Washington and Beijing and now the spat with Mexico, Gapen says “deteriorating economic and financial conditions [will] push the Fed to action.”

“The expansion of tariffs to Mexico after already negotiating a revised USMCA to replace NAFTA represents an important development since trade restrictions are now becoming multilateral in nature”, Barclays wrote, in a note dated Friday afternoon. “In our view, if the US is willing to impose tariff and non-tariff barriers on China and Mexico, then the bar for tariffs on other important US trading partners, including Europe, may be lower than we previously thought”, the bank’s Gapen continues, on the way to delivering his new forecast.

“Our outlook for US economic and financial conditions has worsened, and we now expect the Fed to cut its policy rate by 75bp this year, beginning with a 50bp cut in September”, Gapen says.

That’s right – JPMorgan now sees 50bp of Fed cuts in 2019, and Barclays sees 75bp of easing, with 50 coming in one move.

As far as whether we could see Powell cut rates sooner, Barclays says don’t rule it out. “Earlier action is not out of the question, in our view, if financial conditions deteriorate rapidly”, Gapen concludes.

For the punchline, we go back to Rosenberg:

The bitterest of ironies is that if Trump hadn't publicly badgered the Fed, Powell would be in a position to limit all the damage by cutting rates. But the President basically boxed Jay in. Now for sure the Fed will show up too late.

— David Rosenberg (@EconguyRosie) May 31, 2019