SAN FRANCISCO (Reuters) – Federal Reserve leader Jerome Powell, who last week cut US interest rates as an insurance policy against the effects of "pain" trade tensions, may need to buy more coverage after the United States designated a currency manipulator late Monday .
FILE PHOTO – Federal Reserve Leader Jerome Powell holds a news conference following the Federal Reserve two-day Federal Open Market Committee meeting in Washington, USA, July 31, 2019. REUTERS / Sarah Silbiger
The move of Treasury Secretary Steven Mnuchin launches a formal process to address what the United States says is the "unfair competitive advantage" in trade that China gets with a cheaper yuan.
Stock futures plummeted, and Treasury futures rose as traders bet that this recent escalation of the US-China trade war would further slow the US economy, forcing the Fed to respond with deeper interest rates to ease economic conditions and encourage businesses to to hire and use.
The decision is "a shocker," said Tim Duy, an economics professor at the University of Oregon.
If last week's interest rate cuts were Fed policies' way of insuring against a possible fire, he said, "The potential for the fire has increased – and that potential is something they will respond to."
Interest rate futures now show traders seeing almost 40% chance of the Fed cutting its borrowing costs by half a percentage point next month, up from less than 2% on Friday and 30% earlier Monday.
U.S. President Donald Trump has picked up tariffs for China with a view to pushing the world's second-largest economy to sign a deal more favorable to Americans, and for months had asked the Fed to lower interest rates to support the US economy while doing so the.
But after the Fed cut its target price target quarter by a quarter percentage point last week to 2% -2.25%, Trump said the central bank had "failed us."
A larger rate cut, he said, would helped the United States keep up with China and other countries.
The next day, Trump announced new 10% tariff on $ 300 billion Chinese imports starting September 1.
On Monday, China put the currency above the 7-yuan-per-dollar level for the first time in more than a decade. Beijing also halted purchases of US agricultural products, sparked a trade war that has fueled financial markets, disrupted supply chains and slowed global growth.
"Are you listening to the Federal Reserve?" Trump tweeted after the yuan's decline, marking the devaluation "manipulation" just hours before the Treasury made the appointment official.
Although trade is a much smaller part of the overall US economy than still healthy consumer spending, trade uncertainty has accelerated, with companies trimming spending in the last quarter and factories cutting production.
And although the Fed has not sat down and Powell tries not to comment, increasing US trade policy or the value of the US currency, escalating trade tensions increase the chance that what Powell called a "mid-cycle" rate cut could end up to be the start of a deeper, longer episode of policy relief.
"The Fed does not want the market to believe that it is capitulating to a policy or trade fight," said Bank of the West economist Scott Anderson. “But the Fed will respond to a threat to the economic outlook. The threat is real now. ”
Reporting by Ann Saphir; Editing by Sandra Maler; Editing by Sandra Maler