The major monetary policy event last week was Powell’s inaugural semiannual testimony as Fed Chair before Congress. In his remarks, he avoided providing any explicit guidance on the likely pace of rate hikes. However, he characterized the outlook as strong and having improved since the December meeting, which suggested that a faster pace is more likely than a slower pace (click here for our analysis). President Trump’s announcement of new trade tariffs shook markets and several Fed policymakers, including Powell, indicated their concern over the risk of escalating trade conflicts.
Policymaker Remarks
In response to a senator’s question, Powell (3/1) argued that “trade is a net positive. It spreads productivity. It forces our companies to compete. It gives businesses and people the ability to buy and sell things in the world market.” He acknowledged that adverse distributional consequences exist and should be addressed by Congress and the White House to prevent erosion in public support for trade: “The best approach is to deal directly with the people who are directly affected, rather than falling back on tariffs.”
Dudley (3/1) was more explicit about the likely inflationary impact of tariffs: “If tariffs go up, it will, at the margin, tend to put more upward pressure on prices, and those upward pressures on prices will have to be considered.” He warned that a trade war would be negative for global growth: “Countries need to compete better, not compete less. Trade barriers are a very expensive way to preserve jobs in less competitive or declining industries…Raising trade barriers would risk setting off a trade war, which could damage economic growth prospects around the world.” He warned that protectionism has a “siren-like appeal” but that it would “almost certainly be destructive.” Kashkari (3/4) was also concerned about downside risk from trade tariffs: “If you raise steel tariffs, are the steel jobs in the US going to more than make up for the economic effect [on] everybody who is a steel consumer? If you look narrowly at that, the answer is going to be a resounding no.” He was “nervous that there will be economic cost to the US economy in trying to show that the threat is credible.” As the most recent tariff announcements appeared to impact the ongoing NAFTA negotiations, he also noted that disturbance of the integrated supply chains between U.S., Mexico, and Canada would be “enormously disruptive.”
Separately from the trade tariff news, policymakers continued to discuss the appropriate pace of rate hikes this year. Quarles (2/26) said, “the risks are more to the upside than to the downside.” He reiterated that the inflation objective is symmetric, as other policymakers have done. He cited global growth as a current tailwind: “Clearly the U.S. economy is being supported by the overall strength of global growth. If that were to turn that would be a negative.” Dudley (3/1) also saw global growth as supporting U.S. growth and pointed to U.S. fiscal policy as diminishing some downside risk: “Fiscal policy is in the process of turning quite stimulative, and so any worries you had about U.S. economic growth, which I think were already pretty subdued, I would think in the near term should be even more subdued.” Importantly, he saw a pace of four hikes in 2018 as still conforming to the “gradual” description: “if you were to go to four 25 basis-point rate hikes, I’d think it would still be gradual.”