A2| Wednesday, July 31, 2019 *** THE WALL STREET JOURNAL.**
U.S. NEWS
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incorrectly omitted.Asset & Retirement Man-
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day about couples who live
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emailing [email protected] or by calling 888-410-2667.CORRECTIONS AMPLIFICATIONS
ident Trump, who accused
the ECB of deliberately
weakening the euro for com-
petitive advantage.
Fed officials say they
aren’t responding to Mr.
Trump’s pressure. Nonethe-
less, their reasoning isn’t
that different from his. In
their models, chronically
weak eurozone demand
drives down the region’s
neutral interest rate, which
will cause the euro to fall
and the eurozone’s trade
surplus to rise.W
hat Mr. Trump sees
as unfair competi-
tive devaluation is,
according to these models,
simply how monetary policy
works when economies are
open to trade and capital
flows.
It “is not a ‘beggar thy
neighbor’ policy in eithermotive or realization,” Mr.
Clarida wrote in a 2017 pa-
per while a professor at Co-
lumbia University.
But if losing demand to
Europe weakens U.S. growth
and threatens to push infla-
tion too low, U.S. rates must
also drop. In effect, a lower
neutral rate in Europe helps
pull the U.S. neutral rate
down.
“This may look like, but is
not a globally inefficient
‘currency war’ defined as a
‘race to the bottom’ in policy
rates as countries seek to
avoid home currency appre-
ciation,” Mr. Clarida ex-
plained in 2017. In other
words, it is a positive-sum,
not a zero-sum, currency
war, because every country
ends up with lower interest
rates and stronger demand.
In an op-ed in the Financial
Times in late 2017, Mr. Clar-WASHINGTON—Consum-
ers continued to spend at a
healthy clip and stayed
confident heading into the
summer while inflation re-
mained soft, data that will
likely reinforce the Federal Re-
serve’s expected decision to
lower interest rates.
Personal-consumption ex-
penditures—a measure of
household spending on every-
thing from airline tickets to
furniture—increased in June
to a seasonally adjusted 0.3%
from the prior month, the
Commerce Department said
Tuesday. The Fed’s preferred
inflation gauge, the PCE price
index, rose a seasonally ad-
justed 0.12%, below the
monthly pace needed to hit
the central bank’s 2% target.
Meanwhile, a measure of
consumer sentiment re-
bounded in July, suggesting
Americans remain confident
about the U.S. economy de-
spite persistent trade tensions
and slowing global growth.
The Conference Board, a pri-
vate research group, said its
index of consumer confidence
jumped to 135.7 in July, up
from 124.3 in June.
The readings were the last
major economic data-points
that Fed officials saw before
their policy meeting Tuesday
and Wednesday. With the
spending and inflation figures
broadly in line with econo-
mists’ expectations, the data
are unlikely to give the central
bank pause on lowering their
benchmark fed-funds rate
from its current range of
2.25% to 2.5%.
“These numbers are consis-
tent with the story that the
Fed has been telling, in fact,
about how the fundamentals
look good but the risks are
still to the downside,” said Au-
gustine Faucher, chief econo-
mist of The PNC Financial Ser-
vices Group.
Consumer spending, which
fuels roughly two-thirds of
U.S. economic activity, has
been strong in recent months,
underpinning economic
growth in the second quarter.
While outlays slowed in June,
low unemployment and strong
income growth in recent
months suggest consumer fun-
damentals remain “the best
they have been in this expan-
sion,” Mickey Levy, chief econ-
omist at Berenberg Capital
Markets, said in a note.
For Fed policy makers con-
cerned about low inflation be-
coming entrenched, Tuesday’s
data brought a mixed message.
While the overall PCE price
index was sluggish, an under-
lying measure of pricesshowed signs of firming. Its
counterpart, the core PCE
price index—which excludes
volatile food and energy
prices, both of which de-
clined—rose 0.25% in June
from May. That brought the
gains over the past three
months up to an annual pace
of 2.48%.
Helping support core infla-
tion in June were clothing and
paid financial services—two
components that Fed Chair-
man Jerome Powell singled
out earlier this year as factors
contributing to an unexpected
slowdown in price pressures.
Paul Ashworth, chief U.S.
economist at Capital Econom-
ics, said policy makers’ hunch
that low inflation was tempo-
rary could end up being true.
It will likely take several
more months of building price
pressures to ease policy mak-
ers’ concerns about weak in-
flation. Mr. Powell and other
Fed officials have cited a risk
that below-target inflation at a
time of solid growth and low
unemployment could erode ex-
pectations for future price in-
creases. That might lead to a
vicious spiral as businesses
and consumers adjust price-
and wage-setting behavior.
—Kate Davidson
contributed to this article.BYPAULKIERNAN
ANDHARRIETTORRYConsumer
Data Add
To Case for
A Rate Cut
0.25%
May-to-Juneincreaseina
less-volatileinflationmeasureTHE WALL STREET JOURNAL
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CAPITAL ACCOUNT|By Greg Ip
How the ECB Forces the Fed’s Hand
As Federal
Reserve policy
makers gather
in Washington
this week to
weigh cutting
interest rates, a big part of
their decision had already
been made—in Frankfurt.
The European Central
Bank’s policy rate, at minus
0.4%, is already nearly 3 per-
centage points below the
Fed’s. And last week ECB
President Mario Draghi
strongly hinted it will soon
go further into negative ter-
ritory. Fed officials have
concluded they cannot per-
mit U.S. rates to deviate too
far from their foreign coun-
terparts’. So even though the
U.S. economy is in much bet-
ter shape than Europe’s, the
ECB is helping to force the
Fed’s hand.
T
he outside world has
always influenced the
Fed, because a foreign
recession or crisis can hit
U.S. exports and financial
markets. Fed Chairman Je-
rome Powell has cited weak
global growth as a reason
the Fed will probably reduce
rates. The new wrinkle is
that the central bank is fac-
toring not just foreign eco-
nomic developments but also
foreign interest rates into
where U.S. rates ought to be.
“U.S. rates can diverge to
some extent from global
rates but there’s a limit to
how far that process can go,
because of integrated capital
markets,” Fed Vice Chairman
Richard Clarida said recently
on Fox Business Network.
If one central bank raises
rates and another doesn’t,
capital pours into the first
country, pushing its currency
up and putting downward
pressure on inflation, ex-
ports and economic growth.
In the other country, the op-
posite occurs. These dynam-
ics are why other countries
often follow the Fed. This
year, though, the Fed is a fol-
lower, not just a leader.
In late 2015 the Fed began
raising its benchmark inter-
est rate from near zero to-
ward what it viewed as a so-
called neutral interest rate of
about 3% that would neither
spur nor curb economic
growth, while keeping unem-
ployment and inflation low
and stable.
By December 2018, the
rate had topped 2.25%, the
highest of any major devel-
oped-economy central bank.
Some foreign central banks,
especially in emerging mar-
kets, followed suit to prevent
their currencies from falling
against the dollar. This hurt
global growth, one reason
the Fed early this year
stopped raising rates.
Then, as European growth
weakened this year and the
ECB hinted it would cut
rates, bond yields around the
world plummeted, and cries
fortheFedtocutratesgrew.
The loudest came from Pres-ida wrote that there is “a
limit to how far U.S. rates
can diverge from global in-
terest rates without trigger-
ing volatility in markets and
a much stronger dollar that
reduces exports.”
Fed officials haven’t ex-
plicitly cited the ECB as a
factor in their own rate
plans. But its influence has
been clearly felt via the bond
market. When Mr.
Draghi hinted in early
June the ECB would move,
German bond yields plum-
meted from minus 0.24% to
minus 0.32%.
That has exerted a gravi-
tational pull on bond yields
world-wide, including in the
U.S. where the 10-year Trea-
sury yield has dropped be-
low the fed-funds rate.
When long-term yields drop
below short-term rates—an
“inverted yield curve”—a
recession often follows.
Fed officials worry the
inverted yield curve means
their policy is too tight.
This month, Dallas Fed
President Robert Kaplan
said he favored a “modest”
rate cut based on the prem-
ise that “maybe the fed-
funds rate is a little bit out
of kilter with market-deter-
mined rates.”
Whether a rate cut in the
U.S. is the right decision is
still a matter of judgment.
The difference now is that
it isn’t enough for the Fed
to get it right: Other central
banks have to as well.AstheFederalReservechartedadifferentcoursefromthe
EuropeanCentralBank,U.S.bondyieldsremainedinlockstep
withGermanyields.Sources: FactSet (bonds); central banks (rates)2017 ’18 ’-1.-0.00.1.1.2.2.3.0%ECBdepositfacilityrateFederalReserveratetargetU.S.10-yearyieldGermany10-year2017 ’18 ’-1.-0.00.1.1.2.2.3.0%Apple has reduced iPhone
prices in China to be more
competitive with lower-price
handsets from rivals like Hua-
wei Technologies Co. and Xi-
aomi Corp., but its share of
the country’s smartphone
market fell 0.6 percentage
point to 5.8% during the June
quarter, according to Canalys,
a market research firm.
Huawei has been gaining
share from rivals in China, in-
cluding Apple, by touting itself
as the patriotic choice to Chi-
nese consumers willing to
weigh politics as they make a
smartphone purchase, Canalys
said. The Trump administra-
tion in May attacked Huawei,blocking sales of U.S. technol-
ogy to the Chinese smart-
phone giant.
“It’snotamatterofifbut
when Apple gets hit in China,”
said Richard Kramer, an ana-
lyst who tracks the company
for Arete Research.
Huawei said on Tuesday
that revenue rose sharply in
the first half despite its black-
listing issues with the U.S.
Tuesday’s report followed a
string of strong results from
tech giants, which continue to
deliver huge profits amid in-
tensifying regulatory scrutiny.
Facebook Inc., Alphabet Inc.
and Amazon.com Inc. last
week delivered revenuegrowth of about 20% or more
behind sustained dominance of
their core businesses: social
media, digital advertising and
e-commerce.
The tech titans’ supremacy
has put them in the crosshairs
of regulators on both sides of
the Atlantic. The Justice De-
partment is opening a broad
antitrust review into whether
the companies unlawfully sti-
fle competition, and the Euro-
pean Union in March penal-
ized Alphabet’s Google for
limiting how websites dis-
played ads sold by its rivals.
Apple has largely avoided
being drawn into the fray.
Still, the company faces law-suits from customers and de-
velopers in the U.S. over its
control of the App Store,
which serves as the only soft-
ware distribution system for
the more than 900 million
iPhones world-wide. And Spo-
tify Technology SA filed an
antitrust complaint in Eu-
rope, alleging Apple has made
it difficult for rival subscrip-
tion services to market them-
selves in the App Store,
which the company denies.
The legal challenges could
undermine Apple’s growing
services business, which
counts on the App Store for
about a third of sales.
Apple is having one of the
weakest years of Mr. Cook’s
tenure. In April, it reported its
first back-to-back decline in
quarterly revenue and profit
in more than two years.
The company’s business
challenges have come amid
turnover in its executive
ranks. Last month, it said its
chief design officer, Jony Ive,
was departing to form his own
independent design company.
Mr. Cook has charted a
new path forward, shifting
the company’s focus from a
business defined by hardware
hits to one that aims to sell
software and services. It
plans to release new sub-
scription services for original
TV shows and videogames
this fall, as well as a credit
card in August.
Apple faced criticism last
week from President Trump,
who said his administration
wouldn’t provide waivers from
tariffs for parts of its Mac Pro
computers.
Mr. Cook said Apple is seek-
ing those exclusions because it
wants to make its new Mac
Pro in the U.S. It recently be-
gan manufacturing that high-
end, desktop computer in
China after making its previ-
ous model in Austin, Texas.
“We’ve been making the
Mac Pro in the U.S. We want
to continue doing that,” Mr.
Cook said. “We’re working and
investing currently in capacity
to do so because we want to
continue to be here.”“We’re thrilled to report a
return to growth,” Apple Chief
Executive Tim Cook said on an
earnings call.
The iPhone business, which
posted sales of $25.99 billion,
continued to weigh on results
as customers hold on to smart-
phones longer and competition
increases from rivals in China
offering lower-price, feature-
rich handsets. It was the first
time since 2013 iPhones didn’t
account for the majority of Ap-
ple’s revenue in a quarter, ac-
cording to eMarketer.
Apple said it expects reve-
nue in the current quarter of
between $61 billion and $
billion, above consensus ex-
pectations. It returned $21 bil-
lion to shareholders during
the quarter, including $17 bil-
lion in share repurchases.
China’s economic doldrums
also hurt Apple, which counts
on the country for about a fifth
of its revenue. Sales in Greater
China, which includes Hong
Kong and Taiwan, sank 4% to
$9.16 billion. The decline was a
marked improvement from the
prior two quarters, when reve-
nue in China fell more than 20%.
ContinuedfromPageOne
Apple Logs
Growth in
Revenue
MISSISSIPPI
Shooter at Walmart
Store Kills 2 Workers
A gunman described as a dis-
gruntled Walmart employee fa-
tally shot two co-workers and
wounded a police officer before
he was shot and arrested Tues-
day at a Walmart store in north-
ern Mississippi, authorities said.
Southaven Police Chief Macon
Moore said the suspect shot a
Southaven police officer, who was
protected by a bulletproof vest and
suffered minor injuries. The chief
said a second Southaven officer
shot the suspect, who was then
taken to a hospital in Memphis.
Both of the people killed were Wal-
mart workers, Mr. Moore said. Em-
ployees said the first victim was
shot in the parking lot, and the sec-
ond inside the store.
“The entire Walmart family is
heartbroken by the loss of two
valued members of our team,”
Walmart U.S. President and CEO
Greg Foran said.
—Associated PressTHE IRSJudge Rejects Rule to
Shield Groups’ DonorsA federal judge in Montanaoverturned the Internal Revenue
Service’s rule that had limited the
information that politically active
nonprofit groups must provide
the federal government.
Democrats had been complain-
ing about the rule since the IRS
and Treasury Department re-
leased it last July.
Under the change, hailed by
conservative groups, some organi-
zations no longer have to provide
the IRS with confidential lists of
donors. The main beneficiaries in-
cluded social welfare groups such
as an arm of the National Rifle
Association.
Montana Gov.Steve Bullock, a
Democratic presidential candidate,sued the IRS, arguing that the
change limited information-shar-
ing with states. Judge Brian Mor-
ris agreed, setting aside the rule.
The IRS had no comment.
—Richard RubinCHICAGOEx-Teamsters Official
Enters Into Plea DealA former Teamsters official
who was one of Chicago’s most
powerful labor leaders has
pleaded guilty to receiving over
$500,000 in illegal payments and
benefits, including the use of a
yacht.John Coli Sr., 59 years old,
changed his plea to guilty Tues-
day in a federal case focused on
how he squeezed a Chicago com-
pany for cash. He agreed to coop-
erate for a lower prison term of
about 20 months.
The plea deal describes Mr.
Coli threatening in 2016 to bring a
picket line to the company and
“shut it down within an hour” if it
stopped $25,000 quarterly pay-
ments to him.
Mr. Coli pleaded guilty to re-
ceiving prohibited payments as a
union officer and making a false
income tax return. Eleven other
counts will be dismissed.
—Associated PressService With a Smile
Apple’sservicesbusiness,whichincludesAppStoresales,mobilepaymentsanddeviceinsurance,
helpedoffsetweakiPhonesalesanddecliningsalesinChina.
Quarterly revenue, change froma year earlier Quarterly revenue
in Greater China*Source: the company3Q 2019
$11.46B
s13%$25.99B
t12%$20 billion051015FY2017 ’18 ’400102030%FY2017 ’18 ’iPhoneServices*Includes Hong Kong and Taiwan