Kids are back in school, college football starts next week, happy vacations still in mind... maybe a week of traditional mid-August “silly season” news?
Dang. Instead, serious again -- all week long and this morning well-nigh indescribably serious.
Set the scene. The Fed last met on July 31, cut the cost of money by .25% and signaled more cuts. The next day Mr. Trump on his own announced new tariffs on China and that threat to the global economy triggered market panic, especially a fight to US Treasurys. The 10-year T-note cascaded from 2.02% to 1.53% by August 15. In the eight days since that bottom markets have frozen, waiting for today’s policy news from the Fed.
In late August each year since 1978 the Kansas City Fed has sponsored a conference of global central bankers in Jackson Hole, Wyoming. Jackson is a gorgeous place, the Snake river in the foreground, and the Tetons behind looking like a mural we might reach out to touch. In winter more like Greenland, but don’t go there. Back in Greenspan’s days the central bankers in dark suits looked like uncomfortable guests who had not gotten word that the party would be in costume. The central bankers are loosening up, today seen in blue jeans and running shoes.
As the conference began yesterday Fed officials chatted with reporters and gave personal indications of future policy. Then in early afternoon the Fed released minutes of its July 31 meeting. The net result: the Fed is as divided as any time in thirty years (the meeting after which Volcker resigned). About half of the twelve presidents of regional Feds are dug in against deeper cuts unless and until the US economy weakens. These hawks do not comprehend “overseas,” their writings blind to the outside world.
As yesterday wore on, market interest rates rose -- not a lot, but to 10-day highs and above trend. The Fed hawks might go along with a cut at the September 18 meeting for the sake of unity and because markets so deeply expect it, but that would be it unless trouble spreads here.
Powell’s long-awaited speech early this morning was excellent, calming to markets. A brief lesson in Fed history, and these reassuring lines: “In 1993, core inflation... first fell below 2.5 percent, and has since remained in the narrow range of 0.9 percent to 2.5 percent. Thus, after a decade of progress toward maximum employment and price stability, the economy is close to both goals.” Most important, Powell understands the threat from overseas and tariffs and is fully prepared to act. “As the year has progressed, we have been monitoring three factors that are weighing on this favorable outlook: slowing global growth, trade policy uncertainty, and muted inflation.”
The stock market rose a few dozen points, despite bond yields rising also, the 10-year T-note up to 1.65% from two weeks in the one-fifties. Maybe not as much easing ahead as hoped, but the Fed is on guard.
Then all hell broke loose. China announced new tariffs on US goods which will do damage here. China knew Powell’s speech schedule, not an accident that China would announce immediately after, just as Trump had announced the day after the last Fed meeting.
The stock market began to slide, interest rates less so but going down. Then came the tweets: “My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?” and “Our great American companies are hereby ordered to immediately start looking for an alternative to China, including bringing our companies HOME and making your products in the USA.” And then threatened retaliation of some kind later today.
Some China-watchers interpret China’s new tariff as the inevitable answer to Trump’s action on August 1. They say that China could not re-enter negotiations without such counteraction. History is filled with lousy endings to such moves and insults and counter-moves.
US stock markets quickly dived 2.5% in value, the 10-year T-note working on a breach of 1.50%. The economic issues are bad enough, but the president has had an unstable week. “...Hereby order....” does not play well as a cap to his other adventures. This instability itself is in play, not just the policy aspects, and it will be on display again before markets reopen Monday.
This weekend is the meeting of the Group of Seven, in Biarritz, France (probably not for sale). The leaders of Canada, France, Germany, Italy, Japan, the United Kingdom, and the US will convene. Markets will be watching.
Markets have learned not to overreact to the president, and even to ignore him, but there are limits which we are testing now.

The 10-year T-note in trading just this week. The moments of China’s tariff announcement and tweets following are clear:

The Atlanta Fed GDP tracker is still happy:

The ECRI using completely different methodology than the Atlanta model sees the economy at a little more risk, but steady.