AARON PATRICK: Without a bailout from the Federal Reserve, the outlook for shares looks grim

Around the world, many investors are thinking: is this the end of the Fed Put?

The Fed Put is a term to describe policies taken by the US Federal Reserve, or central bank, since the 1980s to prop up the US share market when it gets in trouble.

Never officially acknowledged, the practice helped drive four decades of share market gains, generating huge wealth around the world.

Now, with President Donald Trump’s tariffs adding something like 1.5 percentage points to US inflation, the Fed has to choose between fighting prices and a sluggish economy. Which way it goes, is unclear.

“There’s no question that’s a difficult situation,” Federal Reserve Chair Jerome Powell said on Friday.

Without intervention by the Federal Reserve, the immediate outlook for global shares is grim.

Biggest loss in years

On Monday, the S&P/ASX 200 fell 4.2 per cent to 7346. The biggest loss in five years was driven by fears of a global economic slowdown.

The medium-term consequences for the Australian economy and share market are unclear. Weaker demand for Australian products overseas will hurt profits, including BHP’s coal, Rio Tino’s iron ore, CSL’s drugs, and Macquarie Group’s financial advice. Profits drive share prices.

But, in less than a week, the outlook for interest rates has changed substantially. Lower interest rates usually drive up shares, by making future profits more valuable.

Two economists associated with the Labor Party, former minister Craig Emerson and former adviser Stephen Koukoulas, on Monday called on the Reserve Bank of Australia to hold an emergency meeting to cut interest rates.

The central bank said it had no plans to do so. As recently as last week it said it had not contemplated cutting rates at a board meeting because inflation remained a threat.

No serious investors or economists seem to share that view now. They expect the global trade war to lower inflation by re-directing cheap Asian products to Australia.

Car prices

The competition is already intense. In New South Wales, for example, a Chinese-made BYD Sea Lion 6 electric car sells for about $45,000. A Tesla Model 3 sells for about $60,000.

With deflationary pressures heading towards Australia, bond market investors rate the odds of a half a percentage point (0.5 per cent) cut at the Reserve Bank board meeting on May 20 at 93 per cent. By the end of the year, official interest rates will have fallen from 4.1 per cent to under 3 per cent, the bond market reckons.

Even Treasurer Jim Chalmers, who knows he is not allowed to influence Reserve Bank’s decisions, cited the 50-point rate-cut predictions at a press conference on Monday.

In doing so, he raised expectations that his appointee as governor, Michele Bullock, may find difficult to ignore.

“Obviously we take seriously the warnings from economists around the world about the risk of a global recession,” Dr Chalmers said.

A new Fed Put?

Could the Reserve Bank save the share market and become the new Fed Put? That is uncertain. But history shows lower rates are great for property prices, which are a bigger share of Australians’ wealth anyway.

The best way to solve the crisis, of course, would be for the US to reach agreements with its trading partners. Vietnam, which makes a lot of America’s clothing, offered over the weekend to lower tariffs on US products from an average 9.4 per cent to zero.

After taking a call with the head of Vietnam’s government, To Lam, Mr Trump posted: “I thanked him on behalf of our Country, and said I look forward to a meeting in the near future.”

What that means, nobody knows.

China, a strategic competitor to Vietnam, took the opposite approach. On Friday it imposed a 43 per cent counter-tariff, taking the average to 76 per cent. Such a high trade barrier risks curtailing much of the trade between the world’s two-largest economies.

The outcome will be bad for everyone. If all the Trump tariffs are implemented, investment bank Goldman Sachs on Monday predicted the US would enter a recession.

Which raises the central question for investors: is Mr Trump negotiating, or does he really believe upending the global trading system will make America richer?

The answer will shape the future of the investment markets.