US Fed: Prospect of trade war poses ‘downside risks’ to economy

WASHINGTON, UNITED STATES: The prospect of a trade war poses ‘downside risks’ to the US economy, which otherwise is poised to grow at a solid pace, the Federal Reserve said.

While the Fed said the steep tariffs on steel and aluminium imports that President Donald Trump imposed last month would not on their own have a significant effect, the possibility of “retaliatory trade actions by other countries” could be harmful.

In the minutes of March 20-21 monetary policy meeting, when the Fed raised the benchmark interest rate for the first time this year, the Fed also cited “other issues and uncertainties associated with trade policies” as risks to the outlook.

Business contacts in many of the Fed’s 12 regions reported concern about the tariffs, with the agriculture sector “feeling particularly vulnerable to retaliation,” the minutes said.

Trade tensions with Beijing have escalated in recent weeks since Trump announced the tariffs and targeted China for additional 25 percent punitive duties on nearly US$50 billion in goods for its alleged theft of US intellectual property.

Each side has since upped the ante with further tariff threats, spooking global equity markets amid the real concern that a trade war could erupt.

China’s President Xi Jinping offered some conciliatory words this week, promising to open the country’s economy further, which defused some of the strain.

And while some observers were sceptical of the substance, it was seen as a sign a negotiated settlement could be possible.

Despite the concern over trade policy, the discussions by the Fed’s policy-setting Federal Open Market Committee at the first meeting chaired by Trump-pick Jerome Powell were mostly upbeat and indicated the economy was expected to grow at a solid pace.

The recent tax cuts and budget agreement “were expected to provide a significant boost to output over the next few years,” the minutes said.

However, the Fed said it would be hard to quantify the impact of the tax cuts, since there is little experience with providing this type of fiscal stimulus in an economy already maxed out.

And some officials noted that the higher budget deficits caused by the tax cuts also pose a “downside risk to the economic outlook.”

The Fed noted once again that inflation is expected to hit the central bank’s two percent target over the medium term, despite staying stubbornly below that level for many months. — AFP