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Fed Rate Conspiracy Theory Abounds Over Mexico Tariffs

Conspiracy

Trump insists he remains "deadly serious" about slapping a 5-percent tariff on Mexico it if fails to stem migration, and another 5 percent every month thereafter, but the markets never know whether to take him seriously in his games of leverage. If he does, it will signal to investors worldwide that nothing is too much, and there would be no psychological barrier to going after just about any trade partner. “If Mexico is on the table for additional tariffs, it’s quite possible that other countries could be dragged into a larger trade dispute. There are still Europe and Japan and it raises questions: if the administration is willing to have two simultaneous disputes, why stop there? Who’s next?” - said Jonathan Millar, senior U.S. economist at Barclays Plc.

This is where recession fears become even more realistic, and that idea may actually be behind what some economists feel is actually a ploy by Trump to force the Fed into an interest rate cut.

For now, there are no clear signs of any such move by the Fed, with Chairman Jerome Powell saying only that the “central bank will keep a close eye on growing trade tensions to determine what actions if any, the central bank may need to take."

The Fed’s “patient policy stance" is all we’ve got for now, and it largely echoes the sentiment that the goal is market stabilization and keeping the benchmark rate steady for the rest of this year.

Obviously, with a tariff on Mexican goods stabilization will not be in the cards.  

“Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response. Should the tariffs go to a full 25%, that likely would cause enough damage for the Fed to enact two rate cuts, likely in September and December, Michael Feroli, chief U.S. economist at J.P. Morgan, was cited as saying by CNBC.

Related: Gold Miners Scramble To Raise Cash, Cut Costs

The implications on Wall Street are severe, leading to plenty of curiosity about Trump’s true motives.

"Looking at what's going on with trade, one question some people are asking is why are there so many tweets and why so much attention to trade at this particular moment...We're out of fiscal policy options, since it's unlikely Congress can come to an agreement, and we know that the Fed is independent. So is the causal effect here to push the news on trade to a point that it might impact interest rate decisions? Some people are starting to talk that way," Afsaneh M. Beschloss, founder and CEO of asset management firm RockCreek, said, as reported by Axios.

Goldman Sachs said in a note to clients Friday that the administration will likely implement at least the first round of tariffs on Mexico goods, which means reducing the chances of the trade agreement between three countries (U.S., Mexico and Canada) being enacted by the 2020 U.S. election. The U.S. imported about $350 billion in goods from Mexico last year.

By Michael Kern for Safehaven.com

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