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Trade tensions swirl as US Fed opens policy meeting
WASHINGTON, June 12, 2018 (BSS/AFP) – The US central bank was due to open
a two-day policy meeting Tuesday that markets overwhelmingly expect will
produce the second interest rate hike of the year.
But as policymakers seek to hold off inflation in the world’s largest
economy, global trade tensions are swirling around the meeting, inflamed by
the messy end to last weekend’s contentious Group of Seven summit in Canada.
The potential to disrupt trade and raise prices for key inputs and consumer
products will make the already delicate balancing act for Federal Reserve
even more difficult.
The vigorous health of American jobs markets has driven unemployment down
to levels not seen for 50 years, a time when inflation began an upward course
that caused years of pain and took even longer to correct.
Fed policymakers have been gradually raising the benchmark lending rate
since December 2015 to keep prices in check without roiling financial
markets, and have signaled they will not overreact to a pickup in inflation
as long as it is short-lived and only slightly above the two percent goal.
Futures markets on Monday put the odds of a June rate hike at more than 96
percent, bringing the target range for the key rate up a notch to 1.75-2.0
percent.
But the potential for a global trade war adds a major dose of uncertainty
to the economic outlook.
US President Donald Trump imposed punishing tariffs on steel and aluminum
imports from key suppliers, including G7 partners Canada and Germany, and has
threatened even steeper penalties on auto imports.
Higher prices caused by the tariffs also could slow growth of the US
economy.
And US trading partners like Canada, Mexico and the European Union have
vowed to retaliate against Trump’s aggressive trade actions, and a similar
reaction could come from China.
MORE/MR/ 1217 hrs
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In an unprecedented move, Trump backed out of a joint G7 statement with
traditional allies, whom he accused of “robbing” the United States through
unfair trade practices, and he lashed out in uncommonly personal terms at
Canadian Prime Minister Justin Trudeau.
– Prices in a trade war –
At their most recent meeting in early May, Fed officials noted the
“particularly wide” range of possible outcomes from the trade dispute
depending on how Washington and other economies behaved.
But in the meanwhile “the uncertainty surrounding trade issues could damp
business sentiment and spending,” according to the Fed meeting minutes.
Joseph Gagnon, senior fellow at the Peterson Institute for International
Economics, said a major trade war involving big-ticket import items like
autos could reduce economic potential and lead to job losses.
“That will be like a supply shock where you get more inflation and less
growth and the Fed probably won’t know what to do,” he said.
And this would come at a time when inflation risks are rising, including
higher oil prices, sweeping tax cuts, and a weaker US dollar.
As a result, economists say a fourth rate hike in December is increasingly
likely.
And while the relationship between low unemployment and rising inflation is
less direct than 50 years ago — wages have shown only sluggish growth in
recent years — the painful memory of the 1970s is hard to ignore.
“That slippery slope may or may not be there but nobody knows,” said John
Ryding, chief economist at RDQ Economics. “So it’s only natural that the Fed
continues to take out insurance” in the form of rate hikes, he added.
BSS/AFP/MR/ 1217 hrs