Fed’s Rosengren says trade war could hurt global economy
Federal Reserve Bank of Boston leader says it’s ‘too soon’ to gauge effect of U.S.-China battle
MICHAEL S. DERBY Federal Reserve Bank of Boston leader Eric Rosengren said Monday the accelerating trade war between the U.S. and China is increasing the risk of something bad happening to the economy, adding that in these uncertain times it is best for the U.S. central bank to hold shortterm interest rates steady for now.
In an interview with The Wall Street Journal, Mr. Rosengren said the U.S. imposition of new tariffs on Chinese imports and China’s planned retaliation is a fluid situation for policy makers.
“We do have to be concerned that if we have a more widespread issue with trade and particularly if financial markets react quite negatively to that, it could have the possibility to slow down global growth,” Mr. Rosengren said. But he added “it’s way too soon to be able to make that assessment” and there is still time for the trade issues to be resolved before causing major disruptions to the economy.
Late last week, the Trump administration announced another round of significant tariffs on China, and that nation promised its own tariffs on U.S. goods starting in June. Financial markets took the news hard, with stock prices falling hard and bonds rallying as safe harbor refuge for investors.
The latest round of trade trouble comes as the U.S. economic outlook has been on the mend. Pessimism abounded at the start of the year, but robust hiring coupled with unexpectedly strong growth has raised hopes about the durability of the expansion.
Greater optimism hasn’t done much, however, for a Fed outlook in which officials largely agree there will be no need for rate rises over the course of the year.
Mr. Rosengren is a voting member of the rate-setting Federal Open Market Committee, and he agrees that now isn’t the time to change rates. The official was interviewed by phone while hosting the latest Fed Listens event, where central bank leaders have sought feedback from the public about how monetary policy affects them.
“I’m comfortable with where interest rates are right now,” Mr. Rosengren said.
“We are obviously in the process of discovering how big a shock we are going to get from the recent announcement of tariffs and the retaliation for the tariffs,” he said, adding that for now: “We should really focus on the more near term. And for the near term I don’t think we need to alter policy.”
One factor keeping the Fed on the sidelines is low inflation readings. As of March the Fed’s favorite inflation gauge is up by 1.5% versus the same month a year ago. Stripped of food and energy factors prices were up by 1.6% over the same period. Those readings are well below the Fed’s 2% inflation target, and the shortfall has led to a rising number of economists to say the Fed’s next move should be to lower short-term rates.
“The core inflation rate at 1.6[%] by itself doesn’t bother me if I think it’s going to be primarily for transitory factors,” Mr. Rosengren said.
“I don’t think that, for example, the 1.6 is reflective of the underlying inflation rate, and I do expect that transitory factors have had an impact on reported inflation. I would expect that it would take care of itself over time,” he said.
Mr. Rosengren remains hopeful that inflation will in fact return to target.
“Currently, monetary policy is mildly accommodative, so my expectation is that over time we’ll get back to the 2% inflation target,” he said. Ensuring inflation moves higher “would be one reason to be relatively patient before we decide to make a change in interest rates, particularly on the upside,” the official said.
While Mr. Rosengren wasn’t willing to weigh in on what changes in rates the Fed may have before it, he nevertheless sketched out conditions in which rates could move up again.
“I’m hopeful the economy will continue to be relatively strong and that labor markets will tighten,” the official said. “If we were to get back to 2% inflation and possibly be a little bit above, and the economy looks like it’s still growing relatively quickly, that would be an appropriate time to consider raising rates,” he said.
But if volatile markets and trade troubles slow the global economy. “that would be a situation where we certainly wouldn’t need to raise interest rates,” Mr. Rosengren said.