Federal Reserve officials warn an escalating trade dispute between the U.S. and China is adding an unwelcome layer of uncertainty to an otherwise bright economic outlook, though it’s premature to say what the fallout means for jobs, inflation or monetary policy.
“It increases the uncertainty around the forecast,” St. Louis Fed President James Bullard told reporters Wednesday in Little Rock, Arkansas. “It does present some downside risk, but generally speaking it is too early to tell what the actual impact will be on the U.S. economy.”
(Related: The Stock Market Doesn’t Want a Trade War)
U.S. stocks retreated early Wednesday as investors digested overnight retaliation by Beijing to President Donald Trump’s imposition of tariffs on $50 billion of Chinese goods, which fanned concern the two economic superpowers were marching toward a full-scale trade confrontation. Equities retraced some of the declines, with the S&P 500 index little changed at 1 p.m. in New York after earlier dropping as much as 1.6 percent.
Bullard, an outlier among Fed officials in wanting to keep interest rates on hold for the rest of this year, said investor anxiety may suppress Treasury yields, in turn limiting the Fed’s ability to fulfill projections for another two rate increases this year, because further hikes might invert the yield curve.
“I would see more uncertainty keeping longer rates lower than they would otherwise be. Therefore that could feed back to policy and possibly keep short rates lower than they otherwise would be as well,” he said.
(Related: Chances Rise for 4th Fed Rate Hike in 2018)
U.S. central bankers raised rates a quarter point last month and penciled in two or three more increases this year on the basis of an outlook that saw solid U.S. growth and further reductions in unemployment which, at 4.1 percent in February, is already at its lowest levels since 2000.