Concerns About Trade Impacts on Sentiment, Markets, and Activity—But Not on Inflation

FOMC participants continued to comment publicly on the economic implications of trade tensions between the U.S. and China. Brainard (May 16) seemed to suggest the Fed should accommodate any upside inflation  surprise from trade tensions: “Suppose that an unexpected increase in core import price inflation drove  overall” inflation “modestly above” 2% “for a couple of years.” The FOMC would then use that to convey that a “mild overshooting” of inflation is consistent with existing policy goals. Kashkari (May 16) agreed with  the idea that increased tariffs would probably result in a shift in the price level but not have a persistent effect  on the inflation rate: Tariffs represent “a one-time shift in prices, rather than necessarily a change in the  trajectory of inflation.” They “could hurt confidence and cause businesses and potential consumers to pull  back.” He warned that tariffs are “a big unknown and a potentially big risk for the U.S. economy.” Likewise,  Rosengren (May 13) said that wealth effects and other effects are “pretty unpredictable, so it does become  important how much the market reacts over time to the announcements of tariffs.” He thought that tariffs  might have a positive impact on inflation beyond increasing prices for products most directly affected: “For  people with competitive products they’re raising prices even if they’re not affected directly by anything China  is doing.” He elaborated, “This potentially has some persistence, particularly in a tight labor market where the  ability to be raising prices in this environment may be greater than in an environment where we have a lot  more slack in the labor market.” Bostic (May 20) said he has heard companies voice concern that trade policy uncertainty affects their business planning and that they are reaching the point at which they feel pressure to raise prices as a result of tariffs. Barkin (May 15) noted that the significant impact of trade tensions  isn’t the direct impact of tariffs on prices but the effects “on business confidence.” Manufacturing has  “struggled,” possibly because of “second-order consequences of previous inventory build.” But “some of that  could be traded.” Williams (May 14) thought: “we’ve already seen some effects, I think, a little boost to  inflation; some subtractions may be in growth.” 

Several policymakers restated their preference for asymmetric policy bias. Brainard’s speech on  “opportunistic reflation” attracted much attention. She posited: “One possibility we might refer to as  ‘opportunistic reflation’ would be to take advantage of a modest increase in actual inflation to demonstrate  to the public our commitment to our inflation goal on a symmetric basis.” Kashkari (May 16), one of the most dovish FOMC participants, expressed a similar sentiment: “For our current framework to be effective and credible, we must walk the walk and actually allow inflation to climb modestly above 2% to demonstrate that we are serious about symmetry.” Brainard’s priority was to ensure inflation expectations are “firmly” anchored “at–and not below–our target.” She cited the time-varying responsiveness of inflation expectations to actual inflation and said that idea gave “some reassurance” that the goal “may” be attained if inflation moves “only slightly above 2 percent for a couple of years.” Barkin agreed with the “patient”  stance. Clarida (May 20) repeated his thought that “The range of plausible [NAIRU] estimates likely extends  at least as low as the current level of the unemployment rate.” 

Harker (May 17) seemed to have at least changed how he presented his rate hike views, if not his baseline projection itself. He had said that he was (May 6) seeing “one…at most this year.” Last week, he said, “I said ‘at most’ one increase this year. I am not predicting one this year.” Bostic (May 20) saw neither a rate cut nor a rate hike as more likely than the other. He did not expect “a rate cut to be imminent, certainly not by  

September.” However, he noted that circumstances could call for a rate cut: “Things would have to happen for that to play out.” Kashkari was “not in favor of cutting rates either as an insurance cut or because of some recent weakness in some of the data,” citing costs to “shifting our policy position around that much”  and uncertainty as to how easing would really help inflation expectations. George (May 14) didn’t “see an argument right now for a rate cut” and warned of financial stability risk. Bullard (May 20) warned: “If [the  inflation shortfall] turns out to be persistent, I’ll get more aggressive in pushing the FOMC to lower rates in  reaction and try to re-center inflation expectations at 2%.” 

Nowcasts (2019:Q2) 

Source Current One Week Ago Two Weeks Ago
Atlanta Fed GDPNow 1.2% 1.6% 1.7%
New York Fed Staff Nowcast 1.8% 2.2% 2.1%
CNBC/Moody’s Survey 1.9% 2.0% 2.0%

Recent Data 

Last week featured the release of some initial monthly data on spending in Q2. These data were generally softer than expected, leading to modest markdowns in tracking estimates of Q2 real GDP growth. Retail sales in the control group—which includes only those categories of retail sales that are direct inputs into the PCE  data—were flat in April. This group excludes vehicle sales, which had previously been reported as having declined sharply in April. The strong labor market and consumer sentiment remain favorable for consumer spending, however. On that point, the preliminary results of the Michigan survey for May, also released last week, showed a rise in consumer sentiment to a new high for the expansion. It should be noted, however,  that the writeup for this release indicated that this rise largely reflected data collected before the recent deterioration in trade talks between China and the U.S. The Michigan survey also showed a rebound in its measure of longer-term inflation expectations, from 2.3% to 2.6%. The industrial production report for April was also weak. Manufacturing was particularly disappointing: Output declined 0.5% in April and the Q1 data,  already soft, were marked down. The housing starts and permits release for April must also be considered a  disappointment despite the level of starts beating expectations in April on solid gains in both the single-family and multifamily categories in April on top of upward revisions. Single-family permits, which reached a post-recession peak in early 2018 and have been on a downward trend since then despite low mortgage rates,  posted a large decline of 4.2% in April.

Recent Data 

Release Period Actual Consensus Revision to  Previous ReleasePreviously  Released Figure
Import Price Index MoM Apr 0.2% 0.7% — 0.6%
Import Price Index YoY Apr -0.2% 0.3% 0.1% 0.0%
Retail Sales Advance MoM Apr -0.2% 0.2% 1.7% 1.6%
Retail Sales Control Group MoM Apr 0.0% 0.3% 1.1% 1.0%
Industrial Production MoM Apr -0.5% 0.0% 0.2% -0.1%
Manufacturing (SIC) Production MoM Apr -0.5% 0.0% — 0.0%
Capacity Utilization Apr 77.9% 78.7% 78.5% 78.8%
Business Inventories MoM Mar 0.0% 0.0% — 0.3%
Housing Starts MoM Apr 5.7% 6.2% 1.7% -0.3%
Building Permits MoM Apr 0.6% 0.1% -0.2% -1.7%
U. of Mich. Sentiment May P 102.4 97.2 — 97.2
U. of Mich. 5-10 Yr Inflation May P 2.6% — — 2.3%

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