An escalation of ongoing US trade disputes poses a "consequential downside risk" to the economy, which will make the job of the central bank more challenging, the US Federal Reserve has warned.
But with the US economy continuing to grow and the job market strengthening further, many Fed members said they likely will need to raise the benchmark interest rate again "soon," according to the minutes of the Fed policy meeting early this month.
The renewed warning about trade yesterday came just as US and Chinese officials began talks in Washington to try to defuse the spiralling disagreement, with a new round of punitive tariffs on USD 16 billion in goods from each country just hours away.
The United States has imposed tariffs on hundreds of products, mostly from China, and Fed officials said they are seeing the impact of trade disputes on the ground, as businesses across the country face higher prices for necessary inputs and the uncertainty has caused some to delay investments.
All participants in the Fed meeting "pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks". In addition, most said "an escalation in international trade disputes was a potentially consequential downside risk for real activity", according to the minutes.
A large-scale and prolonged dispute likely would adversely impact business sentiment, investment spending and employment, as well as pressuring inflation, the officials warned.
"Moreover, wide-ranging tariff increases would also reduce the purchasing power of US households." The agriculture sector has been hurt by falling crop prices, partly due to the trade battles, the Fed said.
It is not the first time central bankers have expressed concern over the consequences of the aggressive trade policies pursued by President Donald Trump but it was expressed in stronger language than previously.
Despite the trade warning, the Fed was upbeat on the state of the economy, which continues to grow and the labour market has strengthened. And the Fed seemed to confirm the view among economist that it is likely to hike the federal funds interest rate in September and again in December, following increases in March and June.
"Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step," the minutes said.
They continue to believe that "further gradual increases" will allow the US economy to expand and provide "strong labour market conditions" while keeping inflation around the Fed's two percent target.
However, the central bankers noted that the strong growth in the April-June quarter -- which hit 4.1 per cent -- "may have been boosted by transitory factors" including the jump in exports.
US exports rose in the second quarter as buyers rushed to grab products like soybeans before retaliatory tariffs hit in July.
And although businesses facing higher costs are able pass them along to consumers, the Fed again noted that wages "have picked up only modestly," even as businesses complain of difficulty finding workers to fill open positions.
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