5 Things Worth Knowing About Trade Before Fed Votes On Interest Rates

Here are five merchandise trade numbers I would like to have if I were asked to vote today with the Federal Reserve on whether it should lower interest rates a quarter point for the second month in a row.

The Fed is wrestling with a conflict: A weakening job market makes the case for lower rates, while rising inflation argues for holding steady or even raising them.

With one arm tied behind its back because of the U.S. government shutdown, the Fed won’t possess vast swathes of data that it would normally have in the month since it decided to lower interest rates for the first time this year.

Included in that is, of course, U.S. Census Bureau merchandise trade data, which has not been released to the public since Sept. 4.

In less turbulent times, that data might not be of particularly interesting. But it is certainly worthy of the Fed governors’ consideration, because of President Trump’s unpredictable and erratic trade war with the world. Indeed, in just four months this year, the value of the tariffs the Treasury collected as a percentage of total imports quadrupled.

New tariffs not yet in data

That statistic leads to the first thing I might want to know, which is the impact of the tariffs that went into effect in August. Those statistics have not been released due to the government shutdown and, thus, were not part of the July data.

In other words, is there any immediate impact on tariffs that had been announced but did not go into effect on the United Kingdom, Japan, South Korea, Thailand, Malaysia, the Philippines, India and Brazil? These eight countries accounted for 18.61% of all U.S. trade in July.

The end of deminis exemptions

Second question I would ask would be about the impact of the end of the de minimis exclusion, whereby most imports valued at less than $800 could enter the country tariff free.

That was not in the July data either but might be showing up in the August data. Now most closely associated with e-commerce, the category was the 16th most valuable category in July behind a surge in imports ahead of the end of de minimis.

These low-value shipments totaled $16 billion and surged to $2.8 billion in July, ahead of the end of the longstanding regulation. The biggest increase was in shipments from China.

The $100 billion monthly deficit

Third, will the monthly U.S. trade deficit have topped top $100 billion for a fifth time in the first eight months of the year?

Bringing the U.S. trade deficit to heel is a pillar on which President Trump’s trade war stands. Using the International Emergency Economic Powers Act, Trump declared the U.S. trade deficit to be a national emergency. The United States has run an annual trade deficit for decades.

Would a sudden drop in the monthly deficit give the Fed some comfort? Conversely, would another month above $100 billion, another month suggesting the apparent ineffectiveness of the tariffs, play into the Fed’s thinking?

Or, absent that key economic data, would the Fed feel pressure to pause until the U.S. Supreme Court rules on the constitutionality of the IEEPA tariffs?

Two lower courts have ruled Trump has exceeded his presidential power. More than three dozen “friends of the court” amicus briefs have been filed in agreement with those decisions. That includes groups generally friendly to Republican positions, including the U.S. Chamber of Commerce, the American Enterprise Institute, the Hoover Institute and the libertarian Cato Institute or representatives of those groups.

The Supreme Court granted Trump’s call for an expedited decision. It is possible the Supreme Court, which will make a legal decision, will have ruled prior to the next rate decision from the Fed, which is being asked to make an economic decision without a useful piece of data.

Import anomolies: Gold, servers and GLP-1 drugs

Fourth, will any of the three primary import anomalies creating that large U.S. trade deficit change course drastically, helping to lower the deficit but potentially dinging the economy and stock market nonetheless?

Those three are gold, a commodity that normally rises in times of skittishness in the market, flashing warning signs; computer servers for data farms that are fueling the artificial intelligence boom and making some worried about a bust; and pharmaceuticals led by the rapid acceptance of weight-loss GLP-1 drugs like Ozempic, Wegovy and Mounjaro.

Tariff rate quadrupling

The fifth data point I would like to see from the August data before having to cast a vote on interest rates ties back in to the percentage I used in the beginning of this post.

That is the tariff revenue as a percentage of total imports, which has gone from 2.3% the month prior to Trump announcing the trade war with the world on what he called “Liberation Day” to slightly more than 10% in June and slightly less in July. Anything back over 10% would not be a good sign.

Those percentages are not only the highest in decades, they also almost certainly represent the most rapid increase in that percentage since the 1930s.

While inflation has inched upwards toward 3%, remaining stubbornly above the 2% Fed target, many market watchers are either scratching their heads, wondering why inflation hasn’t risen faster, or coming to the conclusion that the tariffs will not do so.

I would be more concerned that it was heading in the wrong direction or, at best, stalled.

The problem is, the August data, while important, would still not include most of the tariffs Trump has threatened this year against the United States’ three largest trade partners, Mexico, Canada and China, which represent almost 40% of U.S. trade. The first two are largely exempted – for now – because of compliance with Trump’s first term USMCA free-trade agreement and the latter by two pauses in exorbitant tariff threats. Those threats led China, which traditionally purchases a majority of U.S. soybeans to not purchase any soybeans in June and July, ahead of the peak season.

Absent the U.S. Census Bureau’s merchandise trade statistics and a number of other government statistics, all locked away in a government shutdown, the Federal Reserve will announce tomorrow its decision. Much is at stake. Having to reverse in November or down the road would be unfortunate. The consensus seems to be, nevertheless, that the Fed will lower the rates another quarter point.