Daily Comment (May 2, 2018)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

Fed rate decision: Today, the Federal Reserve is expected to leave interest rates unchanged, but rising inflation and steady economic growth has led many to speculate that the Fed could raise rates as early as next month.[1]

Presidential subpoena?  In early March, Special Counsel Mueller threatened to issue a subpoena to the president if he did not cooperate with the investigation, according to the president’s former attorney, John Dowd, who resigned later that month. The release of this report adds to the complexity of the ongoing investigation into Russian meddling. Yesterday, questions that Mueller planned to ask President Trump were leaked to the NYT, which drew the ire of Trump who called the leak disgraceful. Although negotiations are still ongoing for a possible interview between Trump and Mueller, it appears that the president’s counsel is trying to apply public pressure in order to gain leverage in negotiating the terms of the interview. A former assistant to Mueller claimed—citing grammatical errors as evidence—that the leak could have come from the president.[2] Furthermore, there has been growing speculation that Trump will try to shut down the investigation prematurely, possibly by removing the official overseeing the investigation, Deputy Attorney General Rosenstein. That said, we are confident a meeting between both sides will eventually take place. So far, markets have not reacted to the reports surrounding the president’s potential interview, but we will continue to monitor the situation.

Heightened trade tensions: There is growing speculation that trade tariff exemptions for U.S. allies will expire on June 1 unless each country agrees to a new trade deal. At a meeting of steel industry executives, White House Trade Adviser Peter Navarro stated that all countries receiving a trade exemption will face an import quota or other restrictions. This development will likely not go over well with the European Union, which has stated it will not negotiate until the exemption is made permanent. In the event that the U.S. imposes tariffs on European steel, the EU has made plans to retaliate in kind by imposing $3.5 billion worth of tariffs on U.S. goods. Although no goods were named specifically, the EU plans to target U.S. steel, industrial products and agricultural products.[3]

Brexit impasse: The likelihood of a “hard” Brexit has increased as pro-Brexit members of Parliament have placed pressure on PM May to drop her plan for a “customs partnership” model, which is one of the two models being discussed in the Brexit cabinet subcommittee meeting. Under the customs partnership model, the U.K. would collect tariffs set by the EU on goods coming into the U.K. on behalf of the EU. If these goods did not leave the U.K. and U.K. tariffs were lower, companies could claim a refund for the difference. The other plan would require the use of technology that would allow countries to pay duties in bulk every few months for access to the U.K. market. Brexit supporters describe the customs partnership as very complicated, unworkable and likely to leave the door open for the U.K. to rejoin the customs union in the future. On the other hand, proponents of the customs partnership model believe it will make it easier to strike future trade deals and satisfy the Irish border problem. The appointment of Sajid Javid as home secretary, who campaigned on remaining in the EU but is now believed to be in favor of Brexit, will likely be a determining factor in the decision.

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[1] Correction: in yesterday’s Daily Comment we reported the rate decision was yesterday.

[2] http://thehill.com/homenews/news/385602-muellers-former-assistant-says-grammatical-errors-prove-leaked-questions-came

[3] https://www.reuters.com/article/us-usa-trade-europe-measures-exclusive/exclusive-eu-may-target-3-5-billion-of-u-s-imports-for-trade-retaliation-sources-idUSKCN1GE2FO