Trade uncertainty could erode investments, confidence: Fed

WASHINGTON, July 5, (AFP): US central bankers warned Thursday that the risks and uncertainty created by tariffs and restrictive trade policies could undermine strong business confidence and investments.

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.

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 also surprised financial markets by signaling it was likely to raise the key rate twice more this year to get ahead of rising inflation pressures but it said that would still allow the economy to continue to expand and create more jobs.

Still, as President Donald Trump is set to impose steep tariffs on tens of billions in Chinese goods starting Friday, added to existing tariffs on steel, aluminum and other products, there were more signs of concern in the Fed’s deliberations about the outlook. China has vowed to retaliate dollar-for-dollar, 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.

“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.

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 rising oil prices, while impacting inflation, would support investment in the petroleum sector.

Other industries also remain upbeat but continue 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 prices.

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.