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Fed sounds the alarm on the damage a trade war could do to the US economy

Federal Reserve officials saw US trade spats with China as a risk to the economy when they held a policy meeting in March.

  • Federal Reserve 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 that Fed officials still expected the economy to strengthen with a boost from tax cuts and increased government spending.
  • 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.
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Most 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 the two countries recently escalated as they announced plans for 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.

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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 toward 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 affect the economy only starting in the second half of the year.

The minutes showed that Fed officials thought it may 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.

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

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