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Just two days before the U.S. was set to impose another round of tariffs on China, the world’s two largest economies agreed upon a partial deal. In the so-called “Phase One,” the U.S. agreed to hold off on the imposition of 15 percent tariffs on $156 billion worth of Chinese goods on December 15th and reduce the tariff rate on $120 billion of goods to 7.5 percent, down from 15 percent. The 25 percent tariffs on another $250 billion worth of Chinese imports will remain in place.
In exchange, China agreed to increase its purchase of American food, energy, manufactured goods and services by a total of $200 billion over the next two years, including a commitment to increase agricultural product purchases from $8 billion to $40 billion. The deal will also make “structural reforms and other changes to China’s economic and trade regime in the areas of intellectual property, technology transfer, agriculture, financial services, and currency and foreign exchange,” according to Office of the U.S. Trade Representative, and “establishes a strong dispute resolution system that ensures prompt and effective implementation and enforcement.” There was no specific date when the next phase of negotiations would begin, but U.S. representatives said that tariffs could go back in place if China fails to live up to its commitments.
After 19 months of tit-for-tat measures, the heat on the U.S.-China trade war should go from a boil to a simmer. Those in the C-Suite may need more than a partial deal to convince them that the economy will improve substantially from current levels. Last week, the Business Roundtable downgraded its CEO Economic Outlook for the seventh straight quarter. Separately, Duke University research found that chief financial officers are bracing for a potential recession next year, by cutting costs and hoarding cash. Keep in mind that the C-Suite has been downbeat, despite a solid labor market, a soaring U.S. stock market, and strong consumer sentiment.
Unlike U.S. corporate chiefs, the Federal Reserve chose to focus on the positive during its final policy meeting of the year. After cutting interest rates three times in the second half of 2019 starting, the central bankers decided put interest rate policy on hold, potentially for a while. In a unanimous decision, officials kept the current level of rates steady, believing that 1.5 to 1.75 percent is the right range to maintain a balanced economy. The Fed also noted that consumers have been doing the heavy lifting this year, with household spending rising at a strong pace, but also underscored that business investments and exports remain weak.
Looking ahead, officials see moderate growth and low unemployment for the next few years. As a result, they anticipate NO interest rate moves in 2020 and just one hike in each of the subsequent two years. That’s rough news for savers, who just a year ago were finally seeing interest rates creep up in their savings and money market accounts. Conversely, borrowers are likely to see low costs for short-term loans, like credit cards, autos and some adjustable rate mortgages. For stock investors, an accommodative Fed has put the cherry on top of strong performance this year. All major indexes are up 20-30 percent year-to-date.