WASHINGTON - The U.S. Federal Reserve’s hesitance to react to world trade tensions may have been dealt a fatal blow Friday by President Donald Trump’s surprise announcement of new tariffs on Mexico, levies that could slam investment and business confidence and leave little doubt the administration’s combative stance is here to stay.
But a wide berth of forecasters, economists and investors said Friday that the prospect of steadily escalating tariffs, slapped without warning across one of the world’s most integrated supply chains, has substantially increased risks to the economy and increased the likelihood the Fed will have to respond.
Financial markets are now pricing in two quarter percentage point Fed rate cuts before the end of the year. Analysts at Barclays went a step further, anticipating the Fed will cut rates a total of 0.75 percentage point by year’s end. Distinct from talk that the Fed might cut rates to help nudge along a decade-old recovery and raise weak inflation, Perli said the Fed may soon face a more conventional rescue mission, cutting rates in the face of an earnest slowdown.
With the Fed’s target interest rate still at a relatively low level of between 2.25% and 2.5%, the central bank may now have to devote its rate cut “ammunition” to battling the impact of the trade war.Even the recent collapse of trade talks with China, and the imposition of higher tariffs on an array of Chinese imports, caused little immediate reaction from Fed officials who noted that employment, household spending and other economic data pointed to continued steady growth.
Along with the blow to confidence and financial markets, there are reasons the Mexico tariffs may move the Fed more than Trump’s other trade actions to date.
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