Real Time Economics: The Fed Is Trying to Tell Us Something

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The Federal Reserve starts its two-day policy meeting today—it’s the final and most momentous of 2018.  

Good morning. Jeff Sparshott here to take you through key developments in the global economy. We’ll look at market and White House apprehension over the path for rates, another big tariff-related payment for farmers, low-level signs of trouble in China, and how Japan is standing up to China and pleasing President Trump. Let us know what you think by replying to this email.


The Federal Reserve wants you to know two things: 1.) It’s less certain about the path for interest rates than just a few months ago. 2.) But it’s not done raising them.

How to communicate that? Since January, officials have written of “further gradual increases” in their post-meeting statement. The WSJ’s Nick Timiraos says officials have been debating how and when to get rid of that language. Striking it would would underscore how officials are focusing on economic data to determine the extent and timing of additional rate moves. “ ‘Data dependent’ is the phrase they’re trying to get the market to focus on. It commits you to a response without committing you to a path,” said Charles Himmelberg, chief markets economist at Goldman Sachs.


Stocks and oil prices slumped as investors waited for the Fed and worried about flagging global growth. The Dow slid more than 500 points Monday and global shares followed Tuesday. Global and U.S. oil prices have both fallen roughly 35% from four-year highs reached in October and are at their lowest levels in more than a year.



U.S. housing starts for November, out at 8:30 a.m. ET, are expected to inch down to an annual pace of 1.22 million from 1.228 million a month earlier.


The Federal Reserve starts a two-day policy meeting.



President Trump won’t be happy if the Fed raises rates again. “It is incredible that with a very strong dollar and virtually no inflation, the outside world blowing up around us, Paris is burning and China way down, the Fed is even considering yet another interest rate hike,” Mr. Trump tweeted. “Take the Victory!”

Analysts widely expect the central bank to raise short-term interest rates, but the focus will be on the outlook for next year. Volatile markets and mixed inflation data have amplified investors’ doubts about how many times the Fed can raise rates, Alex Leary and Nick Timiraos report.


The U.S. government will make a second, multibillion dollar payment to U.S. farmers struggling against tariffs on American soybeans, pork and dairy products, Jacob Bunge reports.

Despite a new North American free trade deal signed in November and this month’s trade truce between the U.S. and China, farmers and livestock producers continue to face low prices for many of their goods, pushed down by tariffs that remain in effect. The U.S. Department of Agriculture estimated both rounds of payments would direct a total of $9.6 billion to farmers. 



China’s Communist elite is marking the 40th anniversary of the market reforms that fueled the country’s economic miracle with an unusual amount of discord, much of it directed at President Xi Jinping. Critics within the party are pointing to China’s flagging economy and down-spiraling relations with the U.S. as proof Mr. Xi has concentrated too much authority in his hands, made policy missteps and provoked pushback against China’s superpower ambitions abroad.

Counterpoint: While there’s some dissent, Mr. Xi remains in control, with no organized opposition or rallying figure, Chun Han Wong reports.


Chinese holdings of U.S. Treasurys are at their lowest levels in nearly a year and a half.

What gives? When the Chinese yuan has come under pressure before, the People’s Bank of China has sold Treasurys to weaken the dollar and reinforce the yuan. So far, the limited drawdown doesn’t indicate the same aggressive intervention seen amid 2015 and 2016’s bout of capital flight. But with these reserves playing such a pivotal role in the global economy, analysts and investors keep a close eye on changes for their knock-on effect on the currency, Mike Bird reports.


Japan plans to spend around $10 billion to become the largest customer outside the U.S. for Lockheed Martin Corp.’s F-35 jet fighters. Prime Minister Shinzo Abe’s government is beefing up Japan’s ability to defend its remote islands as China enlarges its navy. It’s also heeding pressure from President Trump to spend more on American military hardware, Alastair Gale and Chieko Tsuneoka report.



Given recent economic and market developments, the Fed should cease—for now—its double-barreled blitz of higher interest rates and tighter liquidity.—Stanley Druckenmiller and Kevin Warsh, in the WSJ


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More women are working in traditionally male-dominated fields like construction, mining and transportation. “The question, though, is whether this is actually a boon for these new female employees. In the long run, it may not be,” Jed Kolko and Claire Cain Miller write in The New York Times.

On a warm summer’s evening, on a train bound for…Portugal? High bank funding costs can lead to a “gambling trap” in which fragile banks increase holdings of government debt, weakening investment and output, according to a European Central Bank paper. Examining Portuguese data, the paper found that the gambling trap “accounts for macroeconomic dynamics in Portugal over the sovereign debt crisis.” One takeaway, the paper said, is that central bank interventions should provide some risk sharing with depositors.


The U.K. consumer price index for November is out at 4:30 a.m. ET.

The U.S. current account deficit for the third quarter, out at 8:30 a.m. ET, is expected to widen to $126.2 billion from $101.46 billion.

U.S. existing home sales for November, out at 10 a.m. ET, are expected to slip to an annual pace of 5.17 million from 5.22 million a month earlier.

The Federal Reserve releases a policy statement at 2 p.m. ET, and Chairman Jerome Powell holds a press conference at 2:30 p.m. ET.

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