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Trump just took his trade battle to a new front – and now traders are more than ever the Fed is going to cut rates




 donald trump jerome powell Drew Angerer / Getty Images

  • President Donald Trump on Thursday impose tariffs of up to 25% on goods coming into the United States from Mexico until the " illegal immigration problem was remedied . "
  • Fed rate-cut expectations jumped on the news, with t raders now seeing a 50% chance that the Fed will cut rates in July.
  • The average amount of time between the last rate hike and the first rate cut is seven months ̵[ads1]1; we are currently at five months.
  • Visit MarketsInsider.com for more stories

President Donald Trump took his trade battle to a new front on Thursday when he threatened to pay up to 25% on goods coming into the United States from Mexico to the " illegal immigration problem has been remedied. "

global markets that had already been repaired due to the recent renewed trade tensions between the US and China. Those worries sent higher than average 1% on Friday and higher Fed rate-cut expectations higher.

The market now sees a 50% chance that the Fed will cut rates at its July meeting, with that number jumping to 80% for September and 91.4% by year end. On Thursday, traders saw just 34.5% chance the Fed would cut rates in July

The Fed last raised rates in December and is projecting its next hike to happen in 2020. , according to Natixis economist Joe LaVorgna. He says the average time between the last rate hike and subsequent cut is seven months. Fedix rate ” class=”img-responsive imported-news-img” width=”853″ height=”661″ src=”https://images.markets.businessinsider.com/image/5cf1777d11e205036e7173df-853/screen-shot-2019-05-31-at-23933-pm.png”/> Natixis

"If the Fed does not meet investors' expectations, financial conditions (eg, stocks) could dramatically tighten," Natixis economist Joe LaVorgna wrote in a note out Thursday. "This would have negative effects on an economy already in the midst of slowing."

Trump's announcement on Thursday is the latest threat to a US economy that has already shown evidence of release steam as tariffs on imports from Mexico would drive prices on products like, significantly, potentially hurting consumer spending in the US. Recent reports on indicators such as the nominal goods exports and manufacturing activity have been disappointed and the Atlanta Fed GDP now model shows the US economy is tracking to just a 1.2% clip in the second quarter, down from the recently revised 3.1 % growth in Q1

A rate cut would appease Trump. He has called for the Fed to cut rates and start quantitative easing, saying it would boost the economy. "You would see a rocket ship," he told reporters in April.

And LaVorgna said in a Friday note that the Fed should lower rates rather than later to push inflation higher than the Fed has failed to meet its 2% inflation target for last 12 months.

"The current deviation of inflation from the target means that it would take years of 2% – plus inflation for the core PCE to average 2%, "LaVorgna wrote. "At this point, it seems highly unlikely that inflation is extremely low across most of the world."

But others think that Fed should stick to its previous plan and prepare for rate hikes to 2020. "By the time we get to December, we're going to see another pickup in inflationary pressure, which will cause said the Federal Reserve, the global chief investment officer for Guggenheim Investments at the Milken Institute Global Conference on April 29 . "Even though the economy is strong, it's probably a good time to lighten up on risk assets and prepare for possible rate hikes."



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