✂️ The Fed sharpens its scissors

What’s going on here?

The Federal Reserve (Fed) delivered the most explicit signal yet about a September interest rate cut, but stopped short of saying just how big that trim might be.

What does this mean?

At the central bank’s annual conference in the mountain town of Jackson Hole, Wyoming, the Fed chair said “the time has come” to start cutting interest rates. Makes sense: inflation has now dropped to within striking distance of the hallowed 2% target. So now, the central bank has a new priority: to stop the labor market from deteriorating further, via the stimulus that lower interest rates can bring.

Why should I care?

Zooming in: To-do list.

The Fed’s got two goals: to maintain stable prices and to maximize employment. But that’s a hard balance to strike. If the central bank waits too long to lower interest rates, loftier borrowing costs will take a bigger toll on the economy and the labor market. Already, there are some worrying signs of damage – so traders are betting on an interest rate cut of 0.25 percentage points in September, as things stand. But if there’s any whiff of bad news in the next round of job stats, they’ll be expecting a bigger trim.

The bigger picture: Soft landings.

This part was always going to be tricky. The Fed’s at the dismount stage of a notoriously difficult feat: hiking interest rates just enough to bring down inflation without plunging the economy into recession. So if the Fed chair didn’t offer many details – about how big the first cut might be, how many might follow, or how quickly – that may be because, at this point, he simply doesn’t know. And that’s a good reminder for investors: in times of uncertainty, a diversified and balanced portfolio that can perform well in all market conditions is a sensible bet.

What’s going on here?

China’s supposed fix for its sluggish economy – injecting the factory sector with a kind of stimulus steroid – is juicing fears of a fresh trade war.

What does this mean?

Tensions between China and its trading partners are already simmering. The European Union said this week it would slap stiffer tariffs on Chinese EVs, accusing the Red Dragon of “dumping” goods: selling them overseas for less than it costs to make them. Earlier this year, the US blasted China with similar accusations and hiked duties on the country’s steel, aluminum, EVs, among other things. And Turkey and Pakistan followed suit.

Why should I care?

For markets: Winds of change.

Faced with a sputtering economy, the Chinese government’s been handing out loans and stimulus cash to keep factories churning out stuff to sell abroad. Those exports could help make up for weak consumer demand at home, but it makes betting on Chinese companies – and those they do business with – tricky. After all, if their bottom lines are being artificially boosted by government subsidies, there could be a sharp snapback when those go away. And if fears of a full-blown trade war become reality, companies that depend on Chinese imports – think Nike, Walmart, H&M, and Adidas – could get caught in the crossfire.

The bigger picture: The chips are up.

China can't seem to get enough chip-making gear. Its companies have imported nearly $26 billion of chip machinery, just as the US, Japan, and the Netherlands tighten the screws on the country’s access to advanced technology. Chinese chipmakers are on track to increase their output by 14% come 2025, to around 10 million of the tiny things per month. That’s nearly a third of global production – on top of a 15% bump already made this year. And given China’s penchant for over-manufacturing, it’s no wonder the US is eager to block the country from getting its hands on more equipment.