Monday Moneybeat: A trade war ceasefire

MARY REICHARD, HOST: Coming next on The World and Everything in It, the Monday Moneybeat.

NICK EICHER, HOST: We can’t say exactly that peace is at hand in the 15-month trade war between the United States and China. The better term probably is ceasefire. 

American and Chinese trade negotiators late on Friday agreed on a temporary truce: Washington will hold off on another tariff increase that had been set to take effect tomorrow. In exchange, Beijing will spend $40-to-$50 billion on products from American farmers.

Otherwise, the details are a little fuzzy. What remains unresolved is one of the key sticking points for Washington, and that is China’s demand that American companies hand over trade secrets as the price of doing business in the communist country.

This is not an end to the trade war: Still on the schedule is a round of tariff increases hitting $160 billion worth of smartphones made in China. That round is set to take effect on December 15th. 

But about a month before that, President Trump and China’s president Xi Jinping plan a face-to-face meeting in Chile. The two will be attending an economic conference there in mid-November, and that raises hopes the two leaders can work on a comprehensive peace agreement.

REICHARD: The late-afternoon news of the trade-war ceasefire cheered the stock market. Prior to it, all the major stock indexes were headed for another losing week. But in the last half-hour of the trading day, stocks soared, wiping out all the week’s losses and putting all the indexes into positive territory for the week.

The Standard & Poor’s 500 avoided a fifth straight weekly loss and gained six-tenths of a percentage point.

The Dow Jones Industrials added almost a full point, picking up nine-tenths.

The Nasdaq rose the same nine-tenths.

And the Russell 2000 picked up eight-tenths.

EICHER: In September, the price we paid for goods and services remained exactly the same as in August. No change. And that comes after August prices rose just one-tenth of one percent over July. 

If you compare year on year, the Consumer Price Index is up just 1.7 percent. That’s according to Labor Department numbers released on Friday. The CPI is a common measure of inflation.

Now, here’s a qualifier. One of the reasons for the overall price stability is that the cost of gasoline is down quite a bit, almost two-and-a-half percentage points less in September versus August, and that’s a trend. Fuel is more than 8 percent cheaper this year than last.

But prices for fuel and food are typically subject to substantial price swings, and economists prefer to factor those out. If you take the regular CPI and back out the cost of energy and food, that gives you so-called core inflation. That number’s higher: Core inflation is sitting on 2.4 percent year on year.

REICHARD: That might matter to the Federal Reserve, which has set as its target an inflation rate of 2 percent. When it’s below that level, the Fed is more likely to cut interest rates. Above 2 percent, and it’s less likely to do so. 

By the end of the month, the Fed meets to consider whether to cut interest rates for a third time this year, after raising them four times last year.

Last week, Fed chairman Jay Powell spoke to the National Association for Business Economics and in his remarks, he took an interest in a number we reported here last week, the September jobs report. Where we had seen a booming job market, Powell noted, we now see more moderate growth. Some economists took that as a sign that the chairman is leaning toward another rate cut to try to stimulate economic growth and guard against a recession next year.

EICHER: Now, when we talk about the Fed and interest rates, we always always refer to the federal-funds rate. This is the rate banks charge one another for overnight loans.

You might ask, Why do banks lend money to one another on an overnight basis? The reason is to keep themselves in compliance with reserve requirements mandated by government. Banks are required by law to keep a certain fraction of deposits on hand. If they run low, they borrow overnight to maintain their daily reserves.

But there was a glitch in that important financial market recently. The Fed ran short of funds and that prompted a brief spike in the federal-funds rate. 

The law of supply and demand affects everything, and when supply dips below demand, the price goes up. So for one day the Fed couldn’t make good on the low interest rate it had set.

Last week, the Fed announced that it plans to inject more cash into overnight money markets so that this doesn’t happen again.

Chairman Powell says it’s a technical measure to service the banks and isn’t intended as a broad overall boost to the economy. 

The Fed’s glitch in lending reserves is the result of at least two big factors: one, the federal government is issuing much more debt to cover its overspending, and two, government regulations have placed higher reserve requirements on banks.

And that is today’s Monday Moneybeat.

(AP Photo/Andrew Harnik, File) In this Oct. 11, 2019, file photo, U.S. President Donald Trump, right, shakes hands with Chinese Vice Premier Liu He after being given a letter in the Oval Office of the White House in Washington. 

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