Two Federal Reserve Bank presidents discussed how trade policy is effecting the economy and neither seemed willing to cut interest rates.
Businesses are holding back on investing, Federal Reserve Bank of Atlanta President Raphael Bostic said on CNBC Monday morning. There’s no reason to cut interest rates, and should a deal be reached and tariffs be removed, having cut rates would be a mistake, he said.
"In general, my view is as long as we don't see inflation running away, that would be the sign that our policy is basically at a neutral level,” he said in the interview. “We can sustain that for a long period of time, and we don't have to move."
In interviews earlier this month, Bostic warned that tariff costs could be passed on to U.S. consumers.
Speaking at a conference in Phoenix, Federal Reserve Bank of Dallas President Robert Kaplan said trade issues could slow the U.S. and global economy, Bloomberg News reported. He said he is especially concerned about "logistics and supply chain arrangements." He said earlier this month that rates “
President Trump may not go through with some of the threatened tariffs, he said.
Kaplan said it’s "too soon to judge” what the trade issues will mean for inflation, pointing to “the currency reaction” and businesses’ response. Additionally, the Fed will have to determine if the impact is “transitory” or “persistent.”
Technological advances may be muting inflation, he said, according to Bloomberg.
While the U.S. government’s goal of protecting intellectual property and stopping counterfeiting would benefit American businesses, "the possible downside of an outright trade war could outweigh any near-term structural benefit, eroding support for an arguably overextended recovery,” Stifel Chief Economist Lindsey M. Piegza wrote in a commentary.
“As the U.S. continues to engage in a tit-for-tat escalation of trade barriers and taxes, the mounting tensions have an increased risk of harming U.S. businesses and consumers in the short-term, the very same players the administration seeks to protect in the long- run,” she said. “Diplomacy remains an option but many market participants fear the directional momentum is already driving policy down an extended dark path of isolationism, perpetuating the pressure on the Fed to potentially take action with a rate cut(s), as the administration has long requested.”
And China may be on the verge of a current account deficit, according to deVere Group senior international investment strategist Tom Elliott. “China has spent the last two decades turning its trade surplus into purchases of overseas assets, from U.S. Treasuries to London property.”
When its current account goes negative, the nation will depend on foreign capital for growth, he said. “The 25% tariff imposed by the U.S. on $500 billion worth of Chinese imports will accelerate this trend.”
China backing off purchasing U.S. Treasuries and a “ballooning” U.S. deficit will be “negative for U.S. Treasuries, and may help drive up U.S. and global bond yields.”
Borrowing rates are likely to rise as a result, which “could trigger a global economic downturn,” Elliott said.
Separately, speaking at Boston University, Federal Reserve Bank of Philadelphia President Patrick Harker denounced the suggestion that monetary policy could be controlled “mechanically.”
“We’d need a level of accuracy that just isn’t possible,” he said, according to prepared text released by the Fed. “We’d need a lot more data, a lot more frequently, with a lot more precision than the laws of economics allow.”
Flexibility needs to be part of monetary policy, offering “a core structure, but” allowing it to “bend to account for real-world events.”
Economic data
The Federal Reserve Bank of Chicago’s National Activity Index (CFNAI) showed below-average growth. The headline number dropped to negative 0.45 in April from positive 0.05 in March, as production-related indicators pulled down the index.
“Three of the four broad categories of indicators that make up the index decreased from March, and two of the four categories made negative contributions to the index in April,” the Fed said. The three-month moving average, CFNAI-MA3, widened to negative 0.32 in April from negative 0.24 in March.
