The intensifying trade war between the U.S. and China could eventually force higher interest rates, the very opposite of what President Donald Trump wants, some analysts have warned CNBC.
Trump earlier this week called on the Federal Reserve to “match” what he said China would do to offset economic hardship being caused by tariffs as he sought to draft the U.S. central bank into his simmering trade war, Bloomberg reported.
“China will be pumping money into their system and probably reducing interest rates, as always, in order to make up for the business they are, and will be, losing,” the president said in a tweet Tuesday.
“If the Federal Reserve ever did a ‘match,’ it would be game over, we win! In any event, China wants a deal!”
His suggestion that the Fed could help him counter China in the countries’ trade war builds on Trump’s repeated efforts to pressure the U.S. central bank to stimulate the U.S. economy, even though growth is solid and unemployment is at a 49-year low. The remarks may also help him deflect blame onto the Fed if the escalating trade dispute causes the U.S. economy to stumble as he seeks reelection in 2020.
However, some analysts are advising the contrary.
Mark Phelps, CIO of concentrated global equities at AllianceBernstein, recently told CNBC that if prices are pushed up because of Trump’s tariffs on Chinese goods, the Fed may respond to the inflationary impact by hiking interest rates.
Central banks will generally raise rates when inflation is predicted to rise above their inflation target, and higher rates tend toward moderate economic growth.
This increases the cost of borrowing and can curb consumer spending, CNBC explained.
“Tariffs go up, you’ll see some hit to margin for companies, and that probably reduces their investment — that’s not great for growth,” Phelps said.
Many economists have said that newly increased U.S. tariffs on Chinese goods, imposed by Trump as part of a bid to force trade concessions from the world’s second-largest economy, could lead to higher prices for U.S. consumers. Walmart Inc. warned of exactly that on Thursday.
Meanwhile, Jinny Yan, chief China economist at ICBC Standard Bank, also told CNBC that while Trump would love to cut interest rates, “probably the opposite direction would be justified because inflationary pressures will hit the United States, therefore hiking the rates might be the thing to do.”
To be sure, Federal Reserve policymaker said earlier this week that strong U.S. economic growth and subdued inflation mean there is no strong argument for a rate hike or cut right now, though business confidence is fragile.
“There’s not a strong case to push rates higher when inflation is under control; there’s not a strong case to move lower when growth remains healthy,” Richmond Fed President Thomas Barkin told the New York Association of Business Economists in Manhattan.
The Fed has kept rates on hold at their current 2.25-2.50% level this year, spooked by a slide in markets and fear that U.S.-China trade conflict and other issues could put an end to a decade of growth. Barkin said the trade dispute could cause businesses to be less confident and spend less, Reuters explained.
Inflation, meanwhile, has been short of the Fed’s 2% goal, leaving the U.S. central bank in no hurry to hike rates. Markets are pricing in an increasing chance that the Fed’s next move is a cut.
Barkin is the latest in a series of Fed policymakers who have sounded skeptical about using a rate cut or other longer-term tweaks to bring inflation up to the Fed’s target.
Material from Bloomberg and Reuters has been used in this report.
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