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Finance: Fed sounds the alarm on the damage a trade war could do to the US economy
PublishedBy: in Business Insider/FinanceApril 11, 2018

Fed Chairman Jerome Powell

The Fed has said little about how US trade spats with China would affect the economy.

  • Fed officials saw US trade spats with China as a risk to the economy when they held a policy meeting in March.
  • Since then, China and the US have announced additional tariffs on key products.
  • Minutes of the Fed's policy meeting, released Wednesday, showed they still expected the economy to strengthen, as tax cuts and increased government spending provide a boost.
  • The Fed raised its benchmark interest rate last month, in another step away from policies that were designed to recover the economy after the Great Recession.

A majority of Federal Reserve officials see US trade rifts with China as a downside risk for the economy, according to minutes of their policy meeting held in March and released Wednesday.

Trade tensions between both countries recently escalated as they announced tariffs on key products they buy from each other, ranging from Chinese aluminum and steel to American orange juice and soybeans. A recent survey conducted by the Institute of Supply Management showed some factory owners were concerned that tariffs would hike steel prices.

"Participants did not see the steel and aluminum tariffs, by themselves, as likely to have a significant effect on the national economic outlook, but a strong majority of participants viewed the prospect of retaliatory trade actions by other countries, as well as other issues and uncertainties associated with trade policies, as downside risks for the US economy," the minutes said.

At the March 20-21 meeting, the Federal Open Market Committee voted to raise its benchmark interest rate by 25 basis points to a range of 1.50% to 1.75%, as had been widely expected. It was the sixth hike since December 2015, and a step further away from policies that were designed to recover the economy after the Great Recession.

The Fed maintained its forecast for two more rate hikes this year, following speculation on whether budding inflation would push it towards raising its outlook to three more increases.

The minutes showed Fed officials were confident inflation would return to their 2% target, as tax cuts and increased government spending provide a boost to the economy. At his first press conference as Fed chairman, Jerome Powell said the committee expected this fiscal stimulus to only impact the economy starting in the second half the year.

The minutes showed that Fed officials thought it might be appropriate to raise interest rates over the next few years faster than previously expected.

Fed officials saw room for improvement in the labor market, as most of their contacts around the country reported that wage growth was still slow.

Shortly after the minutes were released, stocks added to their losses, while gold fell.

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