Late last week, many were reporting on slumps in the U.S. market, after strong jobs numbers lowered the chances of a larger or more direct Federal Reserve interest rate cut.
The carnage seems to be extending into this week as world markets also decline.
“Global stocks tumbled Monday after unexpectedly strong U.S. employment data tempered hopes the Federal Reserve might cut interest rates,” writes AP reporter JoeMcDonald this morning. “Benchmarks in London, Frankfurt, Tokyo and Shanghai all declined.”
McDonald describes the back and forth inherent in the Fed’s simultaneous consideration of Chinese trade tensions and rosier than expected jobs numbers.
“Fed leaders have said they are ready to cut rates to support economic growth amid a tariff war with Beijing,” McDonald writes. “But investors questioned whether the Fed will think that is needed after Friday’s data on June job creation.”
So for the purposes of clarity – the Fed understands the need to shore up the economy as knee-jerk protectionism throws a wrench in the global market, but with jobs numbers so good, who needs a rate cut?
Analysts note that last year, the Fed raised rates no less than four times, as a hedge against inflation, and to create a kind of interest rate reserve so that cuts could happen without returning interest rates near zero.
That alone highlights the delicacy of the central bank’s situation.
In some ways, low interest rates are like the candy that investors and even some prominent politicians demand as a way to goose the economy in the short term.
However, the supplied economic expertise shows that in the long term, rate increases are needed.
How Jerome Powell and crew navigate those waters sends the market wherever it goes, and although last week’s numbers don’t represent wild gyrations, there does seem to be a pretty legible cause and effect.
For historic context, a chart from The Balance shows Fed Reserve actions over the years.
Will the Fed act to juice up the market with a rate cut now?
It may, or it may not, but the trade war still looms in the background.
“The path to a deal (between the U.S. and China) is unclear,” writes Marketwatch reporter Chris Matthews July 7, along with editor Clive McKeef. “Beijing has given no details as to the timing and magnitude of any new agricultural purchases, while Ministry of Commerce spokesman Gao Feng said last Thursday that a deal could only be reached if the U.S. agrees to remove all tariffs — at odds with the American position that some tariffs must remain in place to ensure Chinese compliance.”
That’s the backdrop for this game of “will they, won’t they” that is currently moving markets. Keep an eye out and factor new revelations from the central bank in short term trading.