Getty Images The U.S. and China are trying to tone down trade tensions, the Federal Reserve is ready to cut interest rates and Americans are still spending plenty of money. So all is well again with the U.S. economy, right?
Not so fast.
The attempt by China and the Trump administration to de-escalate after a series of tit-for-tat tariffs certainly comes as welcome news. The president might delay some pending tariffs and China is offering similar concessions ahead of another round of crucial talks scheduled for October.
The willingness of both countries to step back has helped spur a rally in U.S. stock markets DJIA, +0.14% SPX, -0.07% after priced swooned in August.
What’s also given stocks a boost is the universal belief the Fed will reduce already low U.S. interest rates this week — just in case the trade fight with China escalates again. Lower rates might encourage more Americans to buy a new car or home or refinance a mortgage to lower their monthly payments.
See: MarketWatch Economic Calendar
Not that consumers need lower interest rates to encourage them to spend. They’re already doing that.
Retail sales and consumer spending surged during the summer and aren’t likely to fade much. Higher incomes and the lowest unemployment rate in a half-century have given Americans the confidence to keep spending even though trade tensions have caused key segments of the U.S. economy such as manufacturing to slow.
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All of this is good news, of course, but investors have seen this movie before.
The U.S. and China appeared to make progress on trade talks several times in the past year, only to see repeated breakdowns that angered Trump and spurred him to raise tariffs. The dizzying back and forth has caused business to take a wait-and-see approach.
“The tariffs and escalating tensions are weighing on capital investment and future hiring plans,” said Sam Bullard, senior economist at Wells Fargo.
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The Fed, for its part, is uncharted territory. The central bank lacks the tools to limit the fallout from a full-blown trade war, and with money already cheap, it’s hard to see how even lower rates get anxious business leaders to increase investment.
“Since so many of the risks to the U.S. economy are tangled up in messy politics, [Fed officials] have no better idea than you about what comes next,” said economist Avery Shenfeld of CIBC World Markets.
That leaves consumers to keep doing the heavy lifting for the economy, but even they have their limits. Each time the trade dispute with China has flared up, stock prices and consumer confidence have suffered.
Read: Retail sales get big lift from auto purchases as consumers drive economy forward
“These is only so much the Fed can do,” Bullard said. “Consumers are still underpinning the economy.”