Economic Commentaries

30

Trade wars are not fun and they are not easy to win. In fact there are no winners from a trade war as supply chain disruptions and lower trade volumes harm global growth. Global equity market volatility in recent weeks sent this message and we hope policymakers heed this warning.

The economic outlook is cloudier because of this risk and other external uncertainties like NAFTA negotiations and the Iranian nuclear determination. Will households as a result feel inclined to rebuild precautionary balances following a year in which rising confidence and equity values induced a drawdown? They did in the first quarter. How will business decisions be affected? Recently passed tax legislation was supposed to trigger a capital spending boom which would enhance productivity growth and move economies to a higher growth plane. Businesses may now defer investment plans pending clarity on policy and upcoming earnings calls may offer a clue.

And then there is monetary policy. Trade friction is inflationary in the short run and deflationary in the long run. Chair Powell's first FOMC statement mentioned this risk while not offering a policy response. In the short term other concerns have a risen. The first quarter's economic data here and abroad were for the most part weaker than expected. This is possibly a boomerang from storm related consumer strength late last year. And in recent years the first calendar quarter has been weak only to be followed by strength in succeeding quarters. There was also a late tax refund season this year and unusually stormy weather. Consensus forecasts are for a repeat of past years' performance.

We are somewhat less sanguine. Confidence could be in the process of weakening sustainably. Housing demand and turnover could be being adversely affected by rising mortgage rates and the demand debilitating effect of lost tax deductions. Meanwhile, with the exception of oil, industrial commodity prices have been sliding.

Chair Powell cautioned that market watchers should take policy actions one step at a time as no policy is set in stone. This is another way of expressing the notion that the FOMC is data dependent. Data dependency would in our view suggest fewer rate hikes than markets are anticipating. Further Chair Powell suggested that the FOMC's aggressive preference for rate hikes in 2019-2020 should be taken lightly. He acknowledged that the FOMC's forecasts have been off the mark in recent years and the so called dot plot has been a poor communication tool. Our read is that the Chairman would like to eliminate this tool from the discourse. And if he did it would be a welcome development. Meanwhile, the FOMC has avoided any mention of its modest but persistent course of balance sheet reduction. This seems to be on auto pilot unless economic conditions deteriorate significantly. We do not see a significant deterioration yet but a policy mistake could hasten one. In past years we used to worry about a policy mistake emanating from the FOMC. The chairman seems intent on avoiding this.

Posted in: General