Federal Reserve officials are anxious over the economic impact of President Donald Trump's threatened steel and aluminum tariffs amid fear he has launched a global trade war.
Federal Reserve Bank of Minneapolis President Neel Kaskhari told the Financial Times that he feared Trump's planned tariffs would eventually hurt the U.S. economy instead of helping it.
“If you raise steel tariffs, are the steel jobs in the U.S. going to more than make up for the economic effect [on] everybody who is a steel consumer? If you look narrowly at that, the answer is going to be a resounding no,” said Kashkari in an interview in Washington on Thursday shortly before the White House announcement.
Trump unveiled his decision last week to impose tariffs on steel and aluminum imports, a decision said he would make official early this week.
“I am sympathetic to the desire for fair trade but I am nervous that there will be economic cost to the U.S. economy in trying to show that the threat is credible,” he told the FT.
Many financial analysts warn that Washington’s sudden push for steep tariffs on steel and aluminum imports could saddle the U.S. central bank with the worst of both worlds - rising inflation and a slowing global economy.
The combination of fiscal stimulus, which Fed officials viewed as hardly a game-changer for monetary policy, and a brewing trade war is a recipe for the sort of no-win situation central bankers faced in the 1970s when they had to stomach high inflation or run the risk that interest rate increases would trigger a recession, Reuters explained.
The central bank will now have to factor in the macroeconomic impact of the tariffs, which is expected to be small in itself, but also the broader risk of global retaliation, government-imposed price pressures on a variety of goods, and an ebbing of world trade.
Canada, Brazil and the European Union have already threatened countermeasures, representing what economists refer to as a“deadweight loss” to global welfare. The International Monetary Fund on Friday said Trump’s move likely would damage the U.S. economy as well as the economies of other nations.
In his Capitol Hill testimony, Fed Chair Jerome Powell described trade as a“net positive” while conceding it created some losers in the economy, and said“the tariff approach is not the best approach. The best approach is to deal directly with the people who are affected rather than falling back on tariffs.”
The Fed is expected to increase rates at its March 20-21 policy meeting. Policymakers will also issue fresh forecasts that will indicate whether the core of the rate-setting Federal Open Market Committee has shifted its view, Reuters explained.
For his part, Trump on Monday appeared to suggest that Canada and Mexico could win exemptions to his planned sweeping tariffs on steel and aluminum if the two countries sign a new NAFTA trade deal and take other steps.
"We have large trade deficits with Mexico and Canada. NAFTA, which is under renegotiation right now, has been a bad deal for U.S.A. Massive relocation of companies & jobs. Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed," Trump tweeted.
"Also, Canada must treat our farmers much better. Highly restrictive. Mexico must do much more on stopping drugs from pouring into the U.S. They have not done what needs to be done. Millions of people addicted and dying," he added.
Kashkari said a wholesale withdrawal would be devastating for the U.S. economy, adding that if the chains of production running between Canada, Mexico and the U.S. were torn up it would be “enormously disruptive.”
Would steel tariffs force other countries to be “better actors across the trade spectrum? Maybe, I can’t quantify that.”
Michael Feroli, US economist at JPMorgan Chase, said he saw “no material impact” for the time being on the Fed. If import prices of the affected commodities rose in line with the tariff, it would increase the price of imports accounting for 0.2 percent of U.S. gross domestic product by less than 25 percent, adding less than 5 basis points of price pressure which may or may not feed through to consumer prices.
The S&P 500 ended another rocky week on an upbeat note on Friday, but major indexes still posted their worst week of losses since early February after Trump promised tariffs on aluminum and steel and talked bullishly about“winning” a trade war economists say could decimate growth.
“Markets’ inability to regain confidence is likely to keep stocks defensive,” First Standard Financial Chief Market Economist Peter Cardillo told Reuters. “(We) face uncertainties over trade wars, and potential political problems facing the Eurozone.”
(Newsmax wire services contributed to this report).
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