John Williams, president of the Federal Reserve Bank of New York, said he understands why the financial markets are pricing in an increasing number of rate cuts over the next 18 months, yet stood by the Fed's patient stance.
Speaking at the Council on Foreign Relations, which was webcast, Williams said the markets’ pricing in four rate cuts by the end of next year is “a perspective I can understand.” However, he said, “It doesn’t mean I have to agree or disagree.”
While the Fed takes market views into account, he said, “it doesn’t force us to do one thing or another,” it just shows the market and the Fed have differing views of the economy.
Future recoveries will be slow as central banks “have less room to maneuver,” Williams predicted. “Low interest rates are real and they’re here to stay.”
The U.S. trade deficit narrowed to $50.8 billion in April from an upwardly revised $51.9 billion in March. Economists polled by IFR Markets expected a $50.7 billion deficit. Imports and exports each declined 2.2%, with imports slipping to a 15-month low, and exports posting the largest monthly decline in three years, the Commerce Department said on Thursday.
“While the narrowing trade deficit is expected to add to second quarter U.S. GDP growth, it is not a positive development,” said Scott Anderson, chief economist at Bank of the West Economics. “The shrinking trade deficit reveals a sharp deterioration in global trade flows and fading final demand that will reduce U.S. corporate profits growth and slow consumer and business spending.”
While net trade helped GDP grow in the first quarter, UMB Financial Chief Investment Officer KC Mathews said, “we think net trade will not have a material impact on GDP in the second quarter.”
“Tariffs and trade tensions are clearly slowing both imports and exports, supporting our forecast of slowing global economic growth,” he said. “A slowing global economy will lead to a ‘lower for longer’ interest rate forecast. In addition, as trade tensions impact economic activity, it gives the Federal Reserve ammunition to lower short-term rates.”
Separately, the Labor Department reported first quarter unit labor costs fell 1.6% on an annualized basis, after an initial read of a 0.9% decline. The number for the fourth quarter was revised down to a 0.4% drop from the previously reported 2.5% growth.
Productivity rose at a downwardly revised 3.4% rate in the first quarter.
Non-farm productivity won’t accelerate further “due to the lack of capital expenditures,” Mathews said.
“If there isn’t a trade resolution in sight, I doubt the capex trend reverses. Therefore, weak capex weighs on GDP growth and supports the ‘lower for longer’ bond market theme.”
Jobless claims
Initial jobless claims remained at 218,000 in the week ended June 1. Data for the previous week were revised up to 218,000 from 215,000.
Economists expected 215,000 claims in the week.
Continuing jobless claims rose to 1.682 million in the week ended May 25 from a revised 1.662 million the week before.
