Markets take another tumble
Rising tensions between the U.S. and China pummel stocks as investors start to take seriously the risk of a trade war.
The rapidly escalating trade conflict with China has upended the prevailing economic dynamic of falling unemployment and faster growth, leaving policymakers and investors scrambling to figure out the way forward.
The threat of a trade war loomed over Jerome Powell’s inaugural speech as Federal Reserve chairman on Friday in Chicago, even as he tried to focus attention on the fundamental strength of the American economy. Financial markets fell Friday morning after President Donald Trump’s latest salvo against China, then tumbled further after Powell indicated that the Fed saw no imminent need to adjust its outlook.
The Standard & Poor’s 500 index ended the day down 2.2 percent, closing a turbulent week. The Dow Jones industrial average is down 10 percent from its record
high in late January and it fell 0.7 percent for the week.
Oil prices fell almost 5 percent this week as investors wondered if the increase in trade tensions will reduce demand for oil by slowing down the global economy.
And there was uncertainty in Washington, where lawmakers,
lobbyists and even White House officials struggled to discern how much of Trump’s move was policy and how much was bluster.
The president acknowledged that the trade friction could take a toll. “I’m not saying there won’t be a little pain,” he said in a radio interview Friday. “But we’re going to have a much stronger country when we’re finished.”
In his prepared remarks to the Economic Club of Chicago, Powell did not even mention tariffs. But in a question-and-answer session after the speech, they were the first topic raised.
‘Too early to tell’
The Fed chief, who took his post in February, said it was “too early to say” what impact the dueling trade measures would have. “We don’t know the extent to which the tariffs will actually come into effect and, if so, how big will that effect be and what will the timing of it be,” Powell said. But he made it clear the Fed would watch closely for any sign that the trade dispute was knocking the recovery off course.
The trade tensions complicate what was already a tricky task for the Fed. Hundreds of billions of dollars in tax cuts and spending increases risk fueling inflation, as do wage pressures from a robust labor market. The government’s monthly jobs report on Friday, while more subdued than in recent months, still pointed to a healthy employment picture.
Yet policymakers are wary of acting too aggressively to slow the economy at a time when wage growth has been tepid. The Fed’s response has been gradual interest-rate increases.
Consumer prices
A trade war could act as a drag on economic growth, forcing the Fed to be even more cautious. But tariffs could also raise consumer prices by limiting cheap imports from China and other countries. That could increase the risk that the Fed will lift rates too quickly, choking off the recovery.
“There’s an immediate, knee-jerk reaction to tighten policy more,” said Ellen Zentner, chief U.S. economist for Morgan Stanley.
The latest escalation between the United States and China came Thursday evening, when Trump said he was considering tariffs on an additional $100 billion of Chinese imports. That came on top of the tariffs on steel and aluminum imposed last month and those on $50 billion in Chinese goods that he proposed in recent days. China has responded with its own new tariffs.
It is not clear whether Trump will make good on his latest threats. Larry Kudlow, Trump’s new top economic adviser, has sought to portray the tariffs as an opening bid in a negotiating process with China, and he told reporters that “there are all kinds of back-channel discussions going on.”
But Trump’s Treasury secretary, Steven Mnuchin, indicated that tensions had reached a more combustible level. “There is the potential of a trade war,” Mnuchin said Friday on CNBC. “There is a level of risk that we could get into a trade war.”
Powell said the Fed saw “other signs of economic strength,” citing “steady income gains, rising household wealth and elevated consumer confidence,” which he said would continue to support consumer spending.
Other economists agreed, saying that the recently passed tax and spending measures give the economy added momentum. A full-blown trade war might be enough to short-circuit the recovery, they said, but isolated tariffs — even large ones — most likely are not.
The effect of all this on the Fed’s thinking won’t be clear until the next policy meeting on May 1-2.