After the Federal Reserve released two days worth of Fed minutes to investors, Fed Chairman Jerome Powell is trying to curb financial market panic. After a 10 percent rally, stocks worldwide started to sell off following the release of the Fed minutes, which expressed concerns about rising inflation. Dow futures were down by more than 200 points while investors fear that Powell and other officials at the Fed could be raising interest rates further and sooner than expected.
Early optimism due to strong jobs report
Early Friday, the Federal Reserve released minutes to the Fed’s latest meeting on June 5. In the minutes, a majority of the Fed officials described the economy as strong, but expressed caution about elevated inflation. Several Fed officials expected to hike interest rates, including Fed Chairman Jerome Powell.
The Fed’s minutes come days after employment in the U.S. increased by a net 222,000 jobs in May, faster than the gain of 200,000 jobs in April. This adds to the recent optimism due to positive U.S. economic reports. Reports on U.S. and Chinese trade negotiations are also expected next week.
China’s trade deficit increased to $42.45 billion from $39.89 billion in March. U.S. trade deficit increased from $20.74 billion to $21.51 billion in April. While the trade deficit increase may seem high, it is a temporary occurrence that may not change the idea of a trade war with China. The US Commerce Department stated that the trade deficit will likely rise between $40 billion and $50 billion for June. Analysts will be watching trade negotiations to see if President Donald Trump will declare a new trade war with China this month.
Recession fears may be increasing
Powell also expressed concern about the recent financial market jump in a speech in the U.S. A weak jobs report on Friday in Europe caused markets to jump later in the day, but some blamed it on a rebound after a very significant sell-off earlier this week. The blue-chip index, Dow Jones Industrial Average, jumped by more than 200 points in mid-afternoon. Markets were also supported by solid economic reports, which indicated the U.S. economy may be in good health.
Investors had already moved out of the stock market in anticipation of a possible trade war with China. But the Chinese economy is showing the beginnings of a slowdown as the country’s gross domestic product rose 7.1 percent in April, compared to 8.5 percent the previous month. This follows a report released in April by the National Bureau of Statistics of China showing that the economy had slowed down in the previous quarter.
The U.S. and China are expected to announce an agreement that they have reached before the end of this month. But that could mean that the U.S. will impose new tariffs on Chinese imports, which could cause markets to plummet. Even if they do get a trade deal done by June 30, the next phase could start a month or two later as they still need to get the agreement approved by Congress.
Widespread inflation could hurt China
Many economists expect inflation in China to skyrocket over the next year. China recently announced that it had to release a 6.6 percent increase in its minimum wage in the first half of this year, which will increase costs significantly. The same could happen if the U.S. decides to raise tariffs on Chinese goods.
Even though China has tried to blame the global economic slowdown on its neighbors, it has a lot to do with itself. China is using a lot of debt to spur its economy. This comes after the country refused to slow down its credit binge in previous years. Last year, it issued $12 trillion in debt. In 2018, it reportedly issued $100 trillion in total debt, twice the amount that the United States had in total debt last year.