February third, two thousand twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
1948: The Fed, foreign exchange markets, commodities, and U.S. Treasuries
The main issue in 1948 was combating postwar inflation. The economy was in a period of high absolute inflation (reaching 10% in CPI) but rapid disinflation.On 1948 1 9, the Fed announced its first rate hike in ten years, raising the discount rate. It also increased commercial banks’ reserve requirement ratio on 1 23, tightening monetary policy.
Before the Fed became independent in 1951, it was responsible for keeping Treasury rates low to facilitate government financing, leaving U.S. Treasury rates tightly controlled at very low levels. Commodity prices fell sharply that year; on the one hand, this could not cause rates to fall much further, while on the other, it hurt corporate earnings., so during this period, equities and commodities were positively correlated. Falling commodity prices hurt the U.S. stock market, and the Dow Jones continued to decline, reaching its market low of 48.
After the market bottomed in 2, the Fed amended Regulation T and Regulation U on 5 3 of that year, allowing investors to conduct securities-market margin trading (75%), while the tax-cut billThe Revenue Act of 1948 was forced through (vetoed by Truman, then passed by the House); the market bottomed and rebounded. On 3 4, Truman signed the Marshall Plan to rebuild Europe, and the rally continued through 6 of that year.
On 1 6, the Fed tightened monetary policy further, raising the reserve requirement ratio from 22% to 24%; in mid-to-late 6, the first Berlin crisis broke out, The threat of war halted the market’s advance.In 8 of the same year With commodity prices falling, CPI remained volatile at elevated levels, and the Fed tightened monetary policy further, on 8 12 the Fed raised rates again, increasing the discount rate from 1.25% to 1.5%, and the market moved unevenly lower from 6 to 9.
From 9 to 11, the international situation improved and U.S. domestic industrial production rose year over year, until in 11 Truman was reelected on a platform of government intervention and social welfare, dashing expectations of tax cuts, the market fell before recovering in 12, but declined 2.1% for the full year.
On 16 1 of that year, the French government contacted the British Parliament to discuss considering adjusting the franc’s exchange rate, hoping to reach a new, workable arrangement for the franc-dollar exchange rate. The French government’s main goal was to stabilize the French economy; its fiscal and budgetary measures were the first step in this plan. The next step was to adjust the exchange rate to account for rising prices in France. In its view, setting a new fixed exchange rate was not feasible at the current stage of the economic program. It therefore considered it necessary, during a transition period, to allow some of the convertible currencies find their appropriate exchange-rate level through the operation of the free market.
Washington believed that freedom in the foreign-exchange market should not apply to exchange rates for commercial transactions, but should be limited to financial transactions, such as repatriating French capital from abroad. France found that, given its own economic circumstances, it could not depart from its existing approach.
Under the Articles of the Bretton Woods Agreement, members had to obtain the Fund's approval to change the par value of their currencies, and also undertook not to engage in multiple currency practices without the Fund's authorization. There is no doubt that it was for these reasons that, France applied for the Fund's approval.
France repeatedly made clear that these proposals were intended as transitional measures to address the immediate emergency, with the aim of stabilizing the franc at a fixed, unified exchange rate.British policy took a two-pronged approach: doing everything possible to help the French government achieve its goal of a fixed, unified exchange rate as soon as possible, while taking the necessary measures in the process to limit the impact on its own currency and the many other currencies it was closely watching.
Paris's new free market differed from the prewar free foreign exchange market. Organized through authorized banks in Paris, it would be open only to residents of French territory wishing to buy dollars or escudos for approved purposes. It was not intended to facilitate capital flight, currency speculation, or arbitrage between different currencies.
The International Monetary Fund tried to persuade France to treat it as a transitional measure rather than a long-term arrangement.France's actions in effect showed that if a government could not prevent inflation and rising production costs, no system of foreign exchange controls could keep a currency at a fixed level, calling into question to some extent the ineffectiveness of the entire Bretton Woods system, raising the question of whether the system was based on the availability of various currencies rather than on people's willingness and ability to exchange services, raw materials, and goods.
The franc crisis occurred in January of that year, and the franc depreciated against the dollar44.45%.
【Further Reading】
n 1948-01-26 FRENCH FRANC (DEVALUATION)
2025.02.03
II. Insights
Our Viewpoints and ideas on market.
III. Market Pulse
Our latest Comments on the economic and market environment
Trump imposes tariffs on imports from Mexico, Canada, and China
Trump signed an executive order imposing tariffs on imports from Mexico, Canada, and China, effective 2 4. The White House has tied the conditions for rescinding these tariffs to improvements on immigration and fentanyl, but has provided no specific targets. Although the outlook remains unclear, Wall Street broadly believes that the tariffs on Canada and Mexico tariffs may be short-lived.
The order as implemented is actually identical to the proposal he made last year, so it has effectively already been priced in.(See Notes241130 Trump Tariffs Impact on Greater China Tech Hardware & Server ODMs)
1) The executive order signed by Trump imposes 25% tariffs on imports from Mexico and 25% tariffs on imports from Canada, excluding energy, energy products are subject to 10% tariffs, on imports from imports from China are subject to 10% tariffs.
These tariffs will be added on top of existing tariffs. The specific product details subject to the lower energy tariffs have not been announced, but they are expected to cover oil, natural gas, and electricity. Subsequent Federal Register notices may provide implementation details, including the specific product codes eligible for the lower rates.
2) The White House emphasized one provision in the executive order“retaliation clause”, under which, if a country responds to U.S. tariffs by imposing import duties on U.S. exports or taking similar measures, the president may increase or expand the tariffs imposed under this order to ensure the measure's effectiveness.Although this is clearly a warning about possible retaliation, in practice it does not take effect automatically.
3) The tariffs are scheduled to take effect on 2 4. The White House fact sheet on tariffs and the executive order emphasized fentanyl and immigration issues as the reasons for imposing the tariffs, but provided no clear conditions for rescinding them beyond cooperation and improvements on immigration and fentanyl. Given their potential economic effects and the broad conditions the White House set for removing the tariffs, these are considered more likely to be temporary.
4) According to estimates made before GS, tariffs on imports from Canada and Mexico that remain in place for 25% would raise the U.S. effective tariff rate by 7 percentage points, pushing core PCE prices up 0.7% and having a negative impact of 0.4% on GDP. A 10% tariff on energy products would somewhat reduce this impact.
【Further Reading】
n Notes250122 How much of Trump's tariffs has the market priced in?
n Notes241127 The renminbi: no rush to act
n Notes250129 How did the Fed view tariffs during the previous trade war?
n Notes241226 U.S. consumers' exposure to imports from China
n Notes250115 Extreme market pricing and Inauguration Day behavior
n Notes241120 Commodities: three trade pairs for tariffs and tail risks
2025.02.03
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