Slowing growth overseas, aggravated by President Trump’s confidence-sapping trade fight with China, is the dark cloud hanging over the US economy.
The stock market doesn't seem concerned; the S&P 500 hit a record high on Thursday. Why? Investors think the Federal Reserve will ride to the rescue if things get too out of hand.
They should think twice.
“If things get really difficult with China, it will be hard for the Fed to bail us out,” said Dec Mullarkey, the Wellesley-based managing director of investment strategic research and initiatives at SLC Management, the money-management arm of insurer Sun Life Financial, which oversees $160 billion in assets.
Fed chairman Jerome Powell is powerful, but he’s not a Marvel superhero.
Mullarkey was talking after the Fed completed its two-day policy meeting Wednesday by keeping the target for its benchmark rate steady at 2.25 to 2.5 percent. That's where the rate has been since December, when the Fed finished a cycle of nine increases over three years.
But amid concerns that trade tensions were hurting the economy, central bank officials also signaled their willingness to ease credit if growth falters.
“The case for somewhat more accommodative policy has strengthened,” Powell said at a post-meeting news conference. “It’s really trade developments and concerns about global growth that are on our minds.”
While Trump wants an immediate rate cut — and has considered removing Powell from his job to get it — the Fed will take more time to see how “crosscurrents” buffeting the economy play out. US consumer confidence and spending remain in decent shape. But investments by businesses are weak, reflecting uncertainty over trade, and manufacturing, in the United States and overseas, is losing steam.
“Sentiment is having a very debilitating effect,” Mullarkey said.
He expects two 0.25 percentage-point rate cuts this year, the first coming after the Fed meets next in July. “The market is expecting more, but that would be sufficient to bolster growth and get business back on track.”
Unless the trade picture deteriorates significantly.
“There is no question trade is the wild card,” Mullarkey said.
Such a wild card that even Fed officials are split in their immediate outlook for rates.
Eight members of the policy-setting Federal Open Market Committee — Fed governors and a rotating cast of regional Fed presidents — expect rates to drop by the end of the year. Eight see rates holding steady through year-end, while one official forecasts an increase.
But a majority of FOMC members see rates falling by the end of 2020.
“The much more important question than when the Fed will cut rates is to what end?” said Megan Greene, former chief economist at Manulife Investment Management in Boston and now an incoming senior fellow at the Center for Business and Government at Harvard’s Kennedy School. “I don't think rate cuts will help much.”
Easier credit will take some of the edge off, but not enough to boost business investment or to get inflation, which has stubbornly remained below the Fed’s 2 percent target, moving higher.
Trump has put himself in a bind: He promised to deliver a trade deal with China, but Beijing isn’t rolling over. Meanwhile, businesses are holding back because of all the uncertainty — not only with China, but with Europe and even Mexico. No one sees a recession . . . yet.
China’s unfair trade practices are real and harmful, and the president is right to try to address them. But his unconventional approach — preemptive tariffs, Twitter threats, simultaneous fights with other countries — makes it hard for businesses to plan ahead. The trade fight also has taken a toll on parts of the economy such as soybean farmers and any manufacturer that uses steel in its products.
Stock investors love the prospect of lower rates, apparently, even when it means growth may be waning. The S&P 500 rose nearly 1 percent Thursday to a record 2,954.18. The Dow Jones average also rallied and closed just a fraction below its peak, reached in October.
But check out bond investors, the Eeyores of Wall Street. The yield on the benchmark 10-year Treasury note dipped below 2 percent Thursday, the lowest level since November 2016, as buyers pushed the price higher. The yield inched above 2 percent later in the day.
Sure, the drop in rates — the 10-year yield was 3.24 percent last November — reflects the market’s expectation that the Fed will loosen the money supply, as well as the continued lack of any meaningful inflation. But it also suggests that bond buyers see the economy decelerating and the risks of a recession rising.
Call it the China syndrome.