>>Welcome to the Wells Fargo monthly economic
outlook, a monthly economic commentary. This month Wells Fargo senior economist Tim Quinlan
joins your host Shannon Seery.>>Thanks for joining us. So Tim, there have
been two pretty significant developments in the economy since our last monthly outlook,
the Fed cutting rates by 25 basis points, and the more recent escalation of the trade
war. So let’s start with the Fed rate cut. So how
can the 25-basis-point rate cut impact economic growth?>>Yes, this is a pretty significant development. It’s been almost a decade since the last time
the Fed cut rates, and as a reminder, the reason that the Fed does stuff like this is
to try to reduce the cost of capital for businesses and to free up a little cash flow for households.
And interestingly, things might be a little bit different this time.
Yes, corporations might be able to take advantage of slightly lower rates, but when you look
at the way household debt has evolved since the last cycle, the sort of things that are
on variable interest rates like credit cards or home equity lines of credit are actually
down relative to where they were at the high of the prior cycle, whereas things that tend
to have a more fixed rate like auto loans and student lending have driven all of the
growth in consumer debt. So the rate cut here might not have as much
bang for its buck as it has had in prior economic cycles
>>How do we expect the new 10 percent tariff on the additional $300 billion worth of imports
from China to impact growth?>>Yeah, so we’ve had kind of a long string
of these so far, and they’ve heretofore not been terribly consequential. So you could
go back to the steel and aluminum tariffs or soft wood lumber tariffs, and by and large
things have been kind of geared toward hitting intermediate goods or wholesale goods and
specifically trying to avoid a big impact on consumer prices.
With this latest escalation hitting an additional $300 billion worth of goods, it’s now things
like clothes and toys and tools and the sorts of things that will find their way into consumer
prices relatively quickly. So that means one of two things is going to
happen: Either U.S. importers who have to pay these tariffs to bring these goods in
will have to absorb the cost and not pass on those price increases, or the more likely
outcome is we’re going to see consumer prices kind of nudged higher from these tariffs.
>>And what is your opinion on how the Fed is viewing all this and how they’re going
to adjust policy?>>Yeah, so the Fed is sort of in a difficult
spot here. Officially it ought to be paying attention to things like maximum employment
on one hand and low and stable inflation. Those are the two mandates given to the Fed
by Congress. And if we think about the labor market, we’re
in pretty good shape there. The unemployment rate is near a 50-year low. Job openings remain
historically very high. The pace of hiring is still pretty strong.
The other side of it, the low and stable inflation, you could argue that they’re not quite there
on that. After hitting 2% and staying there for a pretty decent stretch last year, core
inflation in particular has kind of worked its way down closer to 1½% or so. What that
means is the onus is on the Fed to try to stimulate policy in such a way that the price
growth gets back towards that 2% inflation. Now, in an ordinary period I think they’d
look at a red-hot labor market and a close-to-target inflation and say, we don’t need to do anything
here. Indeed that’s why financial markets haven’t really priced in these rate cuts until
just the last couple of months. So I think really what you’re seeing is a
reaction in the Fed to the slowing in global growth that kind of can directly be tied back
to the trade war. The tariffs are kind of having this impact on global growth. That’s
got the Fed a little bit worried and causing them to provide a little bit more accommodation.>>Tim, thanks for joining us. And from all of us at Wells Fargo Securities, thanks for
tuning in. Please join us next month as we discuss our latest economic outlook.>>Thanks for watching. Additional commentary is available on WellsFargo.com/economics.