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US Federal Reserve warns of economic consequences of trade policies

Jul 06, 2018 09:01 AM GMT+0530 | 0 Comment(s)

AFP - US central bankers warned Thursday the risks and uncertainty created by tariffs and trade policies could undermine strong business confidence and investments, as President Donald Trump is set to fire a decisive shot in a global trade war.

The Federal Reserve cited increasing concerns among businesses about domestic and foreign trade policies, as well as rising prices for goods like steel and aluminum, in a report released hours before the US was to impose steep tariffs on tens of billions in Chinese goods.

Given the existing US tariffs on steel, aluminum and other products that are already in place, there were fresh signs of concern in the Fed's outlook as it strives to keep the economy growing without igniting inflation.

China has vowed to retaliate dollar-for-dollar against US goods, following the example of Canada, Mexico and the European Union in hitting back against Trump's aggressive trade stance and sparking a global trade war.

The minutes of the June 12-13 policy meeting, when the Fed raised the benchmark lending rate for the second time this year, also said officials believed it would be "appropriate" to continue gradual rate hikes.

The rate-setting Federal Open Market Committee last month surprised financial markets by signaling it was likely to raise the key rate twice more this year to get ahead of rising price pressures. But it said that pace would still allow the economy to continue to expand and create more jobs.

Still the trade dispute is adding a troubling note to the outlook.

"Most participants noted that uncertainty and risks associated with trade policy had intensified and were concerned that such uncertainty and risks eventually could have negative effects on business sentiment and investment spending," the minutes said.

- Spending postponed -

Companies around the country told the Fed some were already seeing the impact. In addition to higher prices, spending plans had been "scaled back or postponed as a result of the uncertainty over trade policy" and they warned of the potential for further "adverse effects...on future investment activity."

Nevertheless, the Fed minutes noted the economy had continued to expand and said rising oil prices, while nudging inflation higher, would also support investment in the petroleum sector.

Oxford Economics said protectionism was not yet casting a shadow on US growth but the chances of a recession had inched up.

"Indeed, a number of business surveys point to a very positive investment outlook despite ongoing protectionism fears," Oxford said in a research note.

The Fed said other industries also remained upbeat but continued to face difficulty finding workers, which is constraining expansion plans and forcing them to raise wages and invest in training or automation, which also could fuel price growth.

Wage increases have remained moderate so far but central bankers are encouraged inflation has finally reached the Fed's two percent target after languishing for many months.

But officials said it was too soon to declare victory since it was not assured the rate would remain at that level over time.

In fact, some committee members said a "temporary" uptick in inflation above two percent could help cement market expectations that price increases are coming.

That is a process central bankers call "anchoring" inflation expectations, which is important in monetary policy since a belief prices will fall can sap economic activity.

In addition, the Fed notes that fiscal policy -- after the tax cuts approved in December -- is providing stimulus to the economy for "the next few years."

Wall Street dipped shortly after the minutes were released but rebounded, with the benchmark Dow Jones Industrial Average closing 0.8 percent higher.


 

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