Fed cuts rates on 7-3 vote, gives mixed signals on next move

By Howard Schneider and Ann Saphir

WASHINGTON (Reuters) – The U.S. Federal Reserve cut interest rates by a quarter of a percentage point for the second time this year on Wednesday in a widely expected move meant to sustain a decade-long economic expansion, but gave mixed signals about what may happen next.

The central bank also widened the gap between the interest it pays banks on excess reserves and the top of its policy rate range, a step taken to smooth out problems in money markets that prompted a market intervention by the New York Fed this week.

In lowering the benchmark overnight lending rate to a range of 1.75% to 2.00% on a 7-3 vote, the Fed’s policy-setting committee nodded to ongoing global risks and “weakened” business investment and exports.

Though the U.S. economy continues growing at a “moderate” rate and the labor market “remains strong,” the Fed said in its policy statement that it was cutting rates “in light of the implications of global developments for the economic outlook as well as muted inflation pressures.”

With continued growth and strong hiring “the most likely outcomes,” the Fed nevertheless cited “uncertainties” about the outlook and pledged to “act as appropriate” to sustain the expansion.

U.S. stocks, lower ahead of the statement, dropped further, and Treasury yields ticked up from their lows of the day. The S&P 500 was last down 0.64% and the 10-year Treasury note yield inched up to 1.77%.

The dollar gained ground against the euro and yen.

“Another rate cut from the Fed to try to shield the U.S. economy from global headwinds,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. “Today’s move was more of a hawkish easing in that the Fed’s median forecasts for rates suggested no more cuts this year, while some officials dissented.”

New projections showed policymakers at the median expected rates to stay within the new range through 2020. However, in a sign of ongoing divisions within the Fed, seven of 17 policymakers projected one more quarter-point rate cut in 2019.

Five others, in contrast, see rates as needing to rise by the end of the year.

The divisions were reflected in dissents that came from both hawks and doves.

St. Louis President James Bullard wanted a half-point cut while Boston Fed President Eric Rosengren and Kansas City Fed President Esther George did not want a rate cut at all.

There was little change in policymakers’ projections for the economy, with growth seen at a slightly higher 2.2% this year and the unemployment rate to be 3.7% through 2020. Inflation is projected to be 1.5% for the year, below the Fed’s 2% target, before rising to 1.9% next year.

Fed Chair Jerome Powell is scheduled to hold a press conference at 2:30 p.m. EDT (1830 GMT) to elaborate on the policy decision.

The rate cut fell short of the more aggressive reduction in borrowing costs that President Donald Trump had demanded from Fed officials, whom he has insulted as “boneheads” who have put the economic recovery in jeopardy.

The Fed also cut rates in July, the first such move since 2008.

Fed officials have said the rate cuts are justified largely because of risks raised by Trump’s trade war with China, a global economic slowdown and other overseas developments.

Their aim, they say, is to balance the potential need for lower rates against the risk that cheaper money may cause households and businesses to borrow too much, as happened in the run-up to the financial crisis more than a decade ago.

(Reporting by Howard Schneider and Ann Saphir; Additional reporting by Richard Leong in New York; Editing by Paul Simao and Dan Burns)

China strikes back at U.S. with new tariffs on $75 billion in goods

FILE PHOTO: A U.S. flag on an embassy car is seen outside a hotel near a construction site in Shanghai, China, July 31, 2019. REUTERS/Aly Song

By Se Young Lee and Judy Hua

BEIJING (Reuters) – China said on Friday it will impose retaliatory tariffs against about $75 billion worth of U.S. goods, putting as much as an extra 10% on top of existing rates in the dispute between the world’s top two economies.

The latest salvo from China comes after the United States unveiled tariffs on an additional $300 billion worth of Chinese goods, including consumer electronics, scheduled to go into effect in two stages on Sept. 1 and Dec. 15.

China will impose additional tariffs of 5% or 10% on a total of 5,078 products originating from the United States including agricultural products such as soybeans, crude oil and small aircraft. China is also reinstituting tariffs on cars and auto parts originating from the United States.

“China’s decision to implement additional tariffs was forced by the U.S.’s unilateralism and protectionism,” China’s Commerce Ministry said in a statement, adding that its retaliatory tariffs would also take effect in two stages on Sept. 1 and Dec. 15.

The White House and U.S. Trade Representative’s office did not immediately respond to Reuters’ request for comment on China’s latest tariffs.

Though Chinese and U.S. trade negotiators held another discussion earlier in August, neither side appears ready to make a significant compromise and there have been no sign of a near-term truce.

The protracted dispute has stoked fears about a global recession, shaking investor confidence and prompting central banks around the world to ease policy in recent months. U.S. stocks fell on Friday on the news of China’s tariffs, underscoring growth concerns.

In an interview on CNBC, Federal Reserve Bank of Cleveland President Loretta Mester said she viewed the Chinese retaliatory tariffs as “just a continuation” of the aggravated trade policy uncertainty that has begun weighing on American business investment and sentiment.

AGRICULTURE, AUTO SECTORS HIT

The knock-on effects of the U.S.-China trade dispute was a key reason behind the Fed’s move to cut interest rates last month for the first time in more than a decade.

“It is unclear as things stand whether the U.S.-China trade negotiations will continue as planned in early September,” said Agathe Demarais, global forecasting director at The Economist Intelligence Unit, in an e-mail statement.

“All eyes will now turn to the U.S. Fed to see whether Jerome Powell, the Fed Chairman, will react to these developments by accelerating rate cuts.”

Among U.S. goods targeted by Beijing’s latest tariffs were as soybeans, which will be hit with an extra 5% tariff starting Sept. 1. China will also tag beef and pork from the United States with an extra 10% tariff.

China is also reinstituting an additional 25% tariff on U.S.-made vehicles and 5% tariffs on auto parts that had been suspended at the beginning of the year. Carmakers such as Daimler <DAIGn.DE> and Tesla <TSLA.O> had adjusted their prices in China when the auto and auto parts tariffs had been suspended.

Ford <F.N>, a net exporter to China, said in a statement it encouraged the United States and China to find a near term solution.

“It is essential for these two important economies to work together to advance balanced and fair trade,” the company said.

White House trade adviser Peter Navarro told Fox Business News that trade negotiations with China would still go on behind closed doors.

(Reporting by Judy Hua, Min Zhang, Se Young Lee, Stella Qiu, Hallie Gu and Dominique Patton in BEIJING, Yilei Sun in SHANGHAI, Doina Chiacu and David Shepardson in WASHINGTON; Editing by Alison Williams)

U.S. hiring accelerates; annual wage growth strongest since 2009

Job seekers line up to apply during "Amazon Jobs Day," a job fair being held at 10 fulfillment centers across the United States aimed at filling more than 50,000 jobs, at the Amazon.com Fulfillment Center in Fall River, Massachusetts, U.S., August 2, 2017.

By Lucia Mutikani

WASHINGTON (Reuters) – U.S. job growth surged in January and wages increased further, recording their largest annual gain in more than 8-1/2 years, bolstering expectations that inflation will push higher this year as the labor market hits full employment.

Nonfarm payrolls jumped by 200,000 jobs last month after rising 160,000 in December, the Labor Department said on Friday.

The unemployment rate was unchanged at a 17-year low of 4.1 percent. Average hourly earnings rose 0.3 percent in January to $26.74, building on December’s solid 0.4 percent gain.

That boosted the year-on-year increase in average hourly earnings to 2.9 percent, the largest rise since June 2009, from 2.7 percent in December. Workers, however, put in fewer hours last month. The average workweek fell to 34.3 hours, the shortest in four months, from 34.5 hours in December.

The robust employment report underscored the strong momentum in the economy, raising the possibility that the Federal Reserve could be a bit more aggressive in raising interest rates this year. The U.S. central bank has forecast three rate increases this year after raising borrowing costs three times in 2017.

“It definitely makes it a bit more likely that the Fed will have to do more than the three hikes that they’re currently planning for this year,” said Luke Bartholomew, investment strategist at Aberdeen Standard Investments.

Fed officials on Wednesday expressed optimism that inflation will rise toward its target this year. Policymakers, who voted to keep interest rates unchanged, described the labor market as having “continued to strengthen,” and economic activity as “rising at a solid rate.”

U.S. financial markets expect a rate hike in March. The dollar rose against a basket of currencies on the data. Prices for U.S. Treasuries fell, with the yield on the benchmark 10-year note rising to a four-year high. U.S. stock index futures slightly extended losses.

Economists say job gains are being driven by buoyant domestic and global demand.

Given that the labor market is almost at full employment, economists saw little boost to job growth from the Trump administration’s $1.5 billion tax cut package passed by the Republican-controlled U.S. Congress in December, in the biggest overhaul of the tax code in 30 years.

President Donald Trump and his fellow Republicans have cast the fiscal stimulus, which includes a reduction in the corporate income tax rate to 21 percent from 35 percent, as creating jobs and boosting economic growth.

According to outplacement consultancy firm Challenger, Gray & Christmas, only seven companies, including Apple, had announced plans to add roughly a combined 37,000 new jobs in response to the tax cuts as of the end of January.

Economists polled by Reuters had forecast nonfarm payrolls rising by 180,000 jobs last month and the unemployment rate unchanged at 4.1 percent. January’s jobs gains were above the monthly average of 192,000 over the past three months.

The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

JOB GAINS SEEN SLOWING

Job growth is expected to slow this year as the labor market hits full employment. Companies are increasingly reporting difficulties finding qualified workers, which economists say will force some to significantly raise wages as they compete for scarce labor.

Wage growth last month was likely supported by increases in the minimum wage which came into effect in 18 states in January. They probably also got a lift from the tax cut. Companies like Starbucks Corp and FedEx Corp have said they will use some of the savings from lower taxes to boost wages for workers.

Further gains are expected in February when Walmart raises entry-level wages for hourly employees at its U.S. stores. Annual wage growth is now close to the 3 percent that economists say is needed to push inflation towards the Fed’s 2 percent target.

The January household survey data incorporated new population controls. The department also released annual revisions to the payrolls data from the survey of employers and introduced new factors to adjust for seasonal fluctuations.

It said the level of employment in March of last year was 146,000 higher than it had reported, on a seasonally adjusted basis. The unemployment rate dropped seven-tenths of a percentage point in 2017 and economists expect it to hit 3.5 percent by the end of the year.

Employment gains were widespread in January. Manufacturing payrolls increased by 15,000 last month after rising 21,000 in December. The sector is being supported by strong domestic and international demand. A weak dollar is also providing a boost to manufacturing by making U.S.-made goods more competitive on the international market.

Hiring at construction sites picked up last month despite unseasonably cold weather. Construction payrolls increased by 36,000 jobs after rising 33,000 in December. Retail employment rebounded by 15,400 jobs in January after slumping 25,600 the prior month.

Government employment increased by 4,000 jobs following two straight months of declines. There were also increases in payrolls for professional and business services, leisure and hospitality as well as healthcare and social assistance.

(Reporting by Lucia Mutikani; Editing by Andrea Ricci)

Fed interest rate hike expected next week, three hikes expected in 2018/poll

The Federal Reserve headquarters in Washington September 16 2015. REUTERS/Kevin Lamarque/File Photo

By Shrutee Sarkar

BENGALURU (Reuters) – The U.S. Federal Reserve is almost certain to raise interest rates later this month, according to a Reuters poll of economists, a majority of whom now expect three more rate rises next year compared with two when surveyed just weeks ago.

The results, from a survey taken just before the U.S. Senate voted to pass tax cuts that are expected to add about $1.4 trillion to the national debt over the next decade, show economists were already becoming more convinced that rates will need to go even higher.

While about 80 percent of economists surveyed in October said such tax cuts were not necessary, the passage of the bill, President Donald Trump’s first major legislative success, means the forecast risks have shifted toward higher rates, and faster.

The poll’s newly raised expectations for three rate rises next year are now in line with the Fed’s own projections. But they come despite a split among U.S. policymakers on the outlook for inflation, which has remained persistently low.

That is a similar challenge faced by other major central banks, who are generally turning away from easy monetary policy put in place since the financial crisis, looking through still-weak wage inflation and overall price pressures for now.

The core personal consumption expenditures price index (PCE), which excludes food and energy and is the Fed’s preferred inflation measure, has undershot the central bank’s 2 percent target for nearly 5-1/2 years.

The latest Reuters poll results suggest it is expected to average below 2 percent until 2019.

While the U.S. economy expanded in the third quarter at a 3.3 percent annualized rate, its fastest pace in three years, the latest Reuters poll – taken mostly before the release of that data – suggested that may be the best growth rate at least until the second half of 2019.

The most optimistic growth forecast at any point over the next year or so was 3.7 percent, well below the post-financial crisis peak of 5.6 percent in the fourth quarter of 2009.

Still, all the 103 economists polled, including 19 large banks that deal directly with the Fed, said the federal funds rate will go up again in December by 25 basis points, to 1.25-1.50 percent.

“This is about just getting back to a neutral level where monetary policy is neither encouraging growth or pushing against growth,” said Brett Ryan, senior U.S. economist at Deutsche Bank, which recently shifted its view to four rate rises next year.

“The Fed is still accommodative at the moment and we are still some ways away from the neutral fed funds rate which would in the Fed’s view be closer to 2.75 percent. The Fed can hike without slowing the economy.”

Financial markets are also pricing in over a 90 percent chance of a 25 basis-point hike in December, largely based on the falling unemployment rate and reasonably strong economic growth this year.

Asked what is the primary driver behind the Fed’s wish to raise rates further, over 40 percent of respondents said it was to tap down future inflation.

However, almost a third of economists said it is to gather enough ammunition to combat the next recession.

“At some point we are going to have a downturn and they (the Fed) are going to need to react and it is harder to do that when rates are closer to zero,” said Sam Bullard, an economist at Wells Fargo.

The remaining roughly 30 percent had varied responses, including some who said higher rates were needed to avoid risks to financial stability.

Over 90 percent of the 66 economists who answered another question said that the coming changes at the Fed – a new Fed Chair along with several new Fed Board members – will also not alter the current expected course of rate hikes.

“Both the rate tightening outlook and balance sheet reduction program will remain in place as the Fed officials fill open seats. Easing of financial regulation is likely the area that has the most forthcoming changes,” Bullard said.

 

(Additional reporting and polling by Khushboo Mittal and Mumal Rathore; Editing by Ross Finley and Hugh Lawson)

 

On election day, Fed official urges U.S. fiscal investments

presidential election at Public School P.S. 56 in the Manhattan borough of New York, USA

By Jonathan Spicer

NEW YORK (Reuters) – U.S. lawmakers should take advantage of low interest rates by making infrastructure investments and encouraging innovations that boost productivity, a Federal Reserve policymaker said on Tuesday as Americans voted in a presidential election.

Charles Evans, head of the Chicago Fed, waded into the fiscal policy debate just as polls opened. An outspoken dove at the central bank, he said his prediction of 1.75 to 2 percent future economic growth was “informed by some assessment of what policies we are likely to entertain” out of Washington.

The Fed, which is expected to raise rates before year end, has occasionally emerged as an issue in the divisive campaign between front runners Hillary Clinton and Donald Trump. Trump, a Republican, said Fed Chair Janet Yellen was keeping rates low to boost President Barack Obama, a Democrat.

The Fed typically avoids prescribing fiscal policies, though its members have been more strident as their plans for a more aggressive policy tightening fizzled in the face of sub-par growth this year.

“Fiscal policy, if it were more stimulative and if it could be directed into more socially productive uses (like) infrastructure investments that strike me as something we need to do anyway, why not do it when interest rates are lower,” Evans said at a Council on Foreign Relations breakfast.

“That would end up probably increasing real rates too and that would help all of us out.”

Clinton has pledged to unveil a plan to rebuild U.S. infrastructure during her first 100 days, saying this would create new jobs. Trump has proposed increasing spending on the U.S. military and infrastructure but says he would reduce spending on other categories by 1 percent each year.

“There is a real risk if we focus too much on the debt,” Evans said, adding that fiscal policies “might incent certain types of investments or innovations.”

“If you’re restricting labor input so that we’re not going to get growth … it’s just simple arithmetic that’s going to be limiting to what our possibilities are,” he added.

Turning to the Fed’s 2-percent inflation mandate, Evans noted a preferred price measure is now up to 1.7 percent.

“We’re close, we’re getting there, and if I had even more confidence that we were going to get to 2 percent then I’d feel better about monetary policy normalization,” he said.

But there remain “reasons to be nervous about inflation,” including low expectations and the tendency of prices to be “inertial” after years below target, he said.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

Dour U.S. Employment report casts doubts on FED rate hike

People enter the Nassau County Mega Job Fair at Nassau Veterans Memorial

By Lucia Mutikani

WASHINGTON (Reuters) – The U.S. economy created the fewest number of jobs in more than five years in May as employment in the manufacturing and construction sectors fell sharply, suggesting a deterioration in the labor market that could make it harder for the Federal Reserve to raise interest rates.

Nonfarm payrolls increased by only 38,000 jobs last month, the smallest gain since September 2010, the Labor Department said on Friday. Employment gains were also restrained by a month-long strike by Verizon workers, which depressed information sector payrolls by 34,000 jobs.

Underscoring the report’s weakness, employers hired 59,000 fewer workers in March and April than previously reported. While the unemployment rate fell three-tenths of a percentage point to 4.7 percent in May, the lowest since November 2007, that was in part due to people dropping out of the labor force.

“This unusual jobs report puts the Fed in a tricky position. Disappointing job creation numbers, including adverse revisions to prior monthly estimates, argue for the Fed to remain highly accommodative for now,” said Mohamed el-Erian, chief economic adviser at Allianz in Newport Beach, California.

U.S. stock index futures dropped after the data, while prices for U.S. government debt rose. Short-term interest rate futures jumped. The dollarDXY was trading lower against a basket of currencies.

The Fed bank has signaled its intention to raise rates soon if job gains continued and economic data remained consistent with a pickup in growth in the second quarter.

Fed Chair Yellen said last week that a rate increase would probably be appropriate in the “coming months,” if those conditions were met. The U.S. central bank hiked its benchmark overnight interest rate in December for the first time in nearly a decade.

WEAK REPORT

The weak employment report bucks data on consumer spending, industrial production, goods exports and housing that have suggested the economy is gathering speed after growth slowed to a 0.8 percent annualized rate in the first quarter.

Economists polled by Reuters had forecast payrolls rising 164,000 in May and the unemployment rate falling to 4.9 percent.

The goods producing sector, which includes mining, manufacturing and construction, shed 36,000 jobs, the most since February 2010. Even without the Verizon strike, payrolls would have increased by a mere 72,000.

The Verizon workers, who were considered unemployed because they did not receive a salary during the payrolls survey week, returned to their jobs on Wednesday. They are expected to boost June employment.

Other details of the employment report were less encouraging. Average hourly earnings rose five cents, or 0.2 percent. That kept the year-on-year rise at 2.5 percent.

Economists say wage growth of between 3.0 percent and 3.5 percent is needed to lift inflation to the Fed’s 2.0 percent target. There are, however, signs that inflation is creeping higher as the dampening effects of the dollar’s past rally and the oil price plunge dissipate.

A broad measure of unemployment that includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment held steady at 9.7 percent in May.

The labor force participation rate, or the share of working-age Americans who are employed or at least looking for a job, fell 0.2 percentage point to 62.6 percent.

The job gains in May were broadly weak, with the private sector adding only 25,000 jobs, the smallest since February 2010. Manufacturing employment fell by 10,000 jobs and construction payrolls dropped 15,000.

Mining employment maintained its downward trend, shedding 10,000 positions. Mining payrolls have dropped by 207,000 since peaking in September 2014, with three-quarters of the losses in support activities.

Retail payrolls rose 11,400 after shedding jobs in April for the first time since December 2014. Wholesale trade employment fell by 10,300 jobs. Temporary help jobs dropped 21,000. There were declines in utilities and transportation and warehousing employment. Government payrolls increased 13,000.

(Reporting by Lucia Mutikani; Additional reporting by Jennifer Ablan in New York; Editing by Paul Simao)