Fed trades ‘remarkably positive’ for ‘no precedents’ after volatile year

The cornerstone of the Federal Reserve Bank is seen in New York’s financial district. The US Federal Open Market Committee will meet on Tuesday and Wednesday. (Reuters/File)
Updated 16 September 2019

Fed trades ‘remarkably positive’ for ‘no precedents’ after volatile year

  • Authorities likely to cut interest rates by a quarter of a percentage point this week

WASHINGTON: A year ago, US Federal Reserve Chair Jerome Powell held a “remarkably positive outlook” for an economy enjoying a “historically rare” combination of good news including low unemployment, steady inflation and strong growth that were all expected to continue.

When the Fed meets this week, the discussion will be about just how badly that outlook has eroded, and whether officials should still describe themselves as simply tinkering with policies that are about right, or embarked on a more aggressive fight to keep the US recovery on track.

A headline decision to cut interest rates by a quarter of a percentage point is widely expected. More importantly, the Fed’s language and new economic projections will show how deeply a summer of trouble has been felt — from an intensifying US-China trade war and the relaunch of crisis-style stimulus by the European Central Bank to a stream of weak manufacturing data that may hint at larger problems for the US.

“At the end of 2018 it looked like the economy was moving forward in a continued solid manner,” said David Wilcox, director for the Fed’s division of statistics and research until the end of last year and now a fellow at the Peterson Institute for International Economics.

“The risks were predominantly to the upside and it was not prominent on our radar screen or anybody’s that the trade war’s machinations would be taken to the extent that they have been ... The news from abroad, by wide consensus, has been disappointing.”

The US Federal Open Market Committee meets on Tuesday and Wednesday, with a press conference by Powell scheduled to follow the release of the central bank’s statement. The Fed’s likely action to lower its target policy rate to a range of between 1.75 percent and 2 percent, policymakers hope, will boost the economy by easing borrowing costs on everything from car loans to corporate bonds.

Markdowns at the Fed

Since the end of last year, Fed decisions — to take rate hikes off the table in January and then to cut rates in July for the first time in a decade — have helped drive the average 30-year fixed rate home mortgage from an eight-year high of 4.94 percent to around 3.5 percent, for example, enough to save a homeowner more than $200 a month on a $250,000 loan. Since the July rate cut corporate bond issuance has surged as firms take advantage of record low long-term borrowing rates, saving them money or providing capital for projects.

Between September 2018 and their last set of quarterly forecasts issued in June, Fed officials slashed half a percentage point of expected growth from their median projection for 2019 and marked down inflation further away from their 2 percent target. 

At that September 2018 meeting, they had also projected that the fed funds rate would hit 3.1 percent by the end of 2019. It is currently at around 2.1 percent and likely heading lower.

New projections issued Wednesday will show whether officials think things are getting worse, and how much further they think they need to go in terms of rate cuts or other steps to stay ahead of any developing problems.

It’s a tough call that has divided Fed officials among those who want to cut fast and deep, those who want to go slow, and those who want to do nothing at all.

It’s all the economies

US data have been mixed since the Fed last met in July. Business investment has remained weak. Indicators of manufacturing output fell. Employment growth slowed. 

Yet even at the lower-than-expected level of 130,000, the number of jobs created in August is more than enough to absorb new entrants into the workforce and keep the unemployment rate at 3.7 percent.

Wage growth has continued, and “consumers remain the locomotive of the economy,” JP Morgan economist Michael Feroli said after retail sales jumped more than expected in August. 

“There is little reason to expect a near-term retrenchment,” as households benefit from a tight job market and, if the Fed cuts interest rates as anticipated, lower costs to fund home improvements or other large purchases.

In his final public comments before the upcoming meeting, Powell described the US labor market as in “quite a strong position,” and downplayed any risk of recession in the US. Yet it is not just US data Powell is concerned with.

India probes Flipkart, Amazon discounts after retailers complain

Updated 15 October 2019

India probes Flipkart, Amazon discounts after retailers complain

  • Products on Amazon, Flipkart listed at steep discounts in sale
  • Trader groups allege firms violating foreign investment rules

NEW DELHI: The Indian government is looking into whether hefty discounts offered on Walmart-owned Flipkart and Amazon.com during their online festive sales violate foreign investment rules, a commerce ministry official told Reuters.
India introduced new rules in February aimed at protecting the 130 million people dependent on small-scale retail by deterring big online discounts. The rules forced e-commerce firms to tweak their business structures and drew criticism from the United States, straining trade ties between New Delhi and Washington.
While Amazon and Flipkart say they’ve complied with the federal rules, local trader groups say the two companies are violating them by burning money to offer discounts — of more than 50 percent in some cases — during the ongoing festive sales.
Reuters reviewed emails and internal training material from Flipkart showing the company is in some cases offering to reduce, or forfeit, its sales commission from sellers that offer discounts.
The commerce ministry official said the government was reviewing complaints and evidence filed by the Confederation of All India Traders (CAIT), a group representing some 70 million brick-and-mortar retailers, alleging Amazon and Flipkart were violating the foreign investment rules.
The official declined to comment on possible action, but executives from Amazon and Flipkart were summoned to meet commerce ministry officials last week to discuss the matter.
Flipkart in a statement said it had a “good meeting” with government officials and it was “deeply committed to doing business the right way in India.”
Amazon said it had an “open & transparent discussion” with officials and has a high bar for compliance.
Seeking to attract shoppers around the key Hindu festival of Diwali, both retailers have placed full-page advertisements in top national daily the Times of India to showcase discount offerings stretching from Samsung and Apple phones to clothing and diapers.
“Customers are going online because of the unbelievable discounts. Because of this sales at offline businesses are down 30 percent to 40 percent this month,” CAIT’s secretary general Praveen Khandelwal said.
Two emails received by Flipkart sellers in September, just days ahead of the inaugural phase of the festive sales, showed it offering to partly fund discounts.
The company would “burn” 3 percent of the discount if a seller lowered a product price by 15 percent, or 9 percent if the seller discounted by 30 percent, said one of the emails.
In training material posted on Flipkart’s restricted website for its sellers, seen by Reuters, the company asks them to prepare for the festive season by saying “nothing is bigger than this” and explaining how they can benefit by discounting products for Flipkart’s premium customers.
“We want to ensure that you fetch as much profit from it as possible ... whatever the discount you are offering, half of that will be reimbursed to you by Flipkart,” a post said.
A Flipkart source said the incentives were compliant with Indian regulations and were aimed at promoting sellers’ earnings by effectively reducing the commission they pay.
All India Online Vendors Association, whose 3,500 members sell products on various online platforms including Flipkart, in a statement said fewer than 100 of its members benefitted from Flipkart’s partial discount funding, giving some sellers an unfair advantage.