May 29th Financial News

Market Reaction to Court Ruling on Tariffs

Indices and Currency Movements

Broader Market Context

Fixed Income and Commodities

Source: AP

The Growing Challenge of Public Debt

US Debt Ceiling Tensions and Credit Downgrade

European Debt Concerns: Italy and the UK

Debt Pressures in Developing Countries

Federal Reserve officials agreed earlier this month to hold off on any interest-rate moves while they evaluated the impact of President Donald Trump's tariffs on inflation, unemployment, and the broader economy.

According to minutes from their May 6-7 meeting, released Wednesday, “almost all” of the 19 officials that participate in the Fed's meetings on policy saw a risk that "inflation could prove to be more persistent than expected.” The policymakers showed greater concerns about higher inflation than rising unemployment, the minutes showed, a key reason they left rates unchanged.

Their decision flew in the face of Trump's repeated calls to reduce borrowing costs because, in his view, there is “NO INFLATION.” The central bank cut its key rate three times last year to about 4.3%. Federal Reserve staff economists said during the meeting that inflation “remained elevated,” the minutes showed.

Trump's tariffs have created a dilemma for the Fed because the duties could both raise inflation — which the Fed would typically fight with higher interest rates — and slow the economy and push up unemployment, which the central bank usually tries to counter with lower rates.

Officials “judged that downside risks to employment and ... upside risks to inflation had risen, primarily reflecting the potential effects of tariff increases,” the minutes said.

Since the meeting, many officials have underscored that the Fed may have to wait for some time before making any further moves with interest rates.

Policymakers said there was “considerable uncertainty surrounding the evolution of trade policy" and its impacts on the economy, the minutes said.

“Taken together, (officials) saw the uncertainty about their economic outlooks as unusually elevated,” the minutes said.

Source: Yahoo Finance

In a recent discussion on CNBC, Neel Kashkari, who leads the Minneapolis Federal Reserve, raised alarms about the heightened threat of a recession in the United States. He shed light on the worries permeating among businesses, both large and small, in his jurisdiction as the economic climate remains fraught with uncertainty.

What is the Impact of Economic Uncertainty on Investments?

The ambiguity about trade taxes is a significant factor unsettling businesses, Kashkari pointed out. This lack of clarity prompts companies to delay new ventures. Even though firms are capable of adjusting to fixed trade policies, the ongoing uncertainties make it perilous for the economy.

This cautious stance from businesses, echoed by consumers’ hesitation, threatens imminent economic growth. Consequently, fears of an unforeseen downturn in the economy are rising.

Could Trump’s Policies Trigger Stagflation?

Concerns about the economic strategy under former President Donald Trump were reiterated by Austan Goolsbee, President of the Chicago Federal Reserve Bank. He warned that such policies might usher in stagflation, a troubling mix of stagnant growth, inflation, and rising unemployment.

Austan Goolsbee: “We warn that Trump’s policies could cause a period of economic slowdown with rising prices.”

Kashkari acknowledged the significant challenge for the Federal Reserve would be combating persistent inflation alongside an ailing economy. He emphasized prioritizing the battle against inflation as crucial under these circumstances.

Neel Kashkari: “I’m worried about the high inflation persisting in the U.S. and other developed countries for four years. As policymakers, we need to take protective steps to ensure inflation remains around our 2% target.”

How is the Fed Responding to Inflation and Stagnation?

Inflation that outpaces forecasts over recent years highlights the need for doubtless caution against short-term disruptions, Kashkari argued. Long-term price stability, rather than isolated incidents of trade tax-induced hikes, ought to guide the policy framework of the Fed.

The specter of a stagnating economy is causing consumers and businesses to hold back, with economic growth bearing the brunt. Anticipated Fed measures will likely navigate these complexities in future policy directions.

The post-pandemic economic landscape remains sensitive to global shifts. With trade regulations and inflation apprehensions at the forefront, they are expected to continuously influence economic discourse.

• Business activities are increasingly cautious amid uncertain trade policies.
• Consumer and company actions will shape the macroeconomic trajectory.
• Federal Reserve policy decisions are crucial for sustenance of economic stability.

Rising economic risks in the U.S. urge businesses towards more cautious decision-making. The unpredictable nature of trade policies and sustained high inflation pose challenges for short-term investment and employment decisions. Throughout this process, the Federal Reserve’s strategies are pivotal to maintaining economic equilibrium, while the responses of businesses and consumers remain significant in steering macroeconomic outcomes.

Source: CryptoSlate

A U.S. trade court on Wednesday blocked President Donald Trump's tariffs from going into effect, ruling that the president overstepped his authority by imposing across-the-board duties on imports from nations that sell more to the United States than they buy.

The Manhattan-based Court of International Trade said the U.S. Constitution gives Congress exclusive authority to regulate commerce with other countries that is not overridden by the president's emergency powers to safeguard the U.S. economy.

"The court does not pass upon the wisdom or likely effectiveness of the President's use of tariffs as leverage. That use is impermissible not because it is unwise or ineffective, but because [federal law] does not allow it," a three-judge panel said in the decision.

The Trump administration minutes later filed a notice of appeal

The ruling came in a pair of lawsuits, one filed by the nonpartisan Liberty Justice Center on behalf of five small U.S. businesses that import goods from countries targeted by the duties and the other by 13 U.S. states.

The companies, which range from a New York wine and spirits importer to a Virginia-based maker of educational kits and musical instruments, have said the tariffs will hurt their ability to do business.

The White House and lawyers for groups that sued did not immediately respond to requests for comment.

Stephen Miller, a White House deputy chief of staff and one of Trump's lead policy advisers, rebuked the court in a brief social media post, writing: "The judicial coup is out of control."

At least five other legal challenges to the tariffs are pending

Oregon Attorney General Dan Rayfield, a Democrat whose office is leading the states' lawsuit, called Trump's tariffs unlawful, reckless and economically devastating.

"This ruling reaffirms that our laws matter, and that trade decisions can’t be made on the president’s whim," Rayfield said in a statement.

Trump has claimed broad authority to set tariffs under the International Emergency Economic Powers Act (IEEPA), which is meant to address "unusual and extraordinary" threats during a national emergency.

The law has historically been used to impose sanctions on enemies of the U.S. or freeze their assets. Trump is the first U.S. president to use it to impose tariffs.

The Justice Department has said the lawsuits should be dismissed because the plaintiffs have not been harmed by tariffs that they have not yet paid, and because only Congress, not private businesses, can challenge a national emergency declared by the president under IEEPA.

In imposing the tariffs in early April, Trump called the trade deficit a national emergency that justified his 10% across-the-board tariff on all imports, with higher rates for countries with which the United States has the largest trade deficits, particularly China.

Many of those country-specific tariffs were paused a week later. The Trump administration on May 12 said it was also temporarily reducing the steepest tariffs on China while working on a longer-term trade deal. Both countries agreed to cut tariffs on each other for at least 90 days.

Trump's on-and-off-again tariffs, which he has said are intended to restore U.S. manufacturing capability, have shocked U.S. financial markets.

The U.S. dollar rose against both the Swiss franc, a traditional currency safe-haven, and the Japanese yen following the court decision.

Reporting by Dietrich Knauth and Daniel Wiessner; Editing by Sandra Maler

Source: Reuters