Fed says trade war downturn could pose challenges

Federal Reserve Board Chair Jerome Powell attends a House Committee on Financial Services hearing, Wednesday, July 18, 2018, on Capitol Hill in Washington. (AP Photo/Jacquelyn Martin)

WASHINGTON — Federal Reserve Chairman Jerome Powell said Wednesday that the central bank has tools it can use to cushion the potential economic fallout from a trade war. But he told Congress the effort could be challenging if higher tariffs push inflation up too sharply.

If the retaliatory tariffs imposed by other countries slowed U.S. economy, Powell said the Fed could employ its normal tools, such as lowering interest rates.

But he said that could become complicated if higher U.S. tariffs on foreign products caused inflation to accelerate. That's because the Fed's normal response to higher inflation is to raise interest rates, not lower them.

"If we do have higher inflation, that could be very challenging for policy," Powell told members of the House Financial Services Committee.

Testifying before Congress for a second day, Powell said that Fed officials were hearing a "rising chorus of concern" from business contacts around the country about potential harm from President Donald Trump's tariffs.

The sentiment was echoed in the Fed's latest "beige book" report, which noted that manufacturers in all of the Fed's districts were expressing concerns about the tariffs. The report released Wednesday is based on anecdotes compiled from the Fed's 12 regional banks. It found that in many districts, manufacturers were seeing in many districts "higher prices and supply disruptions that they attributed to the new trade policies."

Asked about the findings in the Fed report, White House press secretary Sarah Sanders said that the overall economy was doing well and the tariffs were part of the president's hopes "to open up a number of markets and create a more level playing field across the globe."

The Fed's economic survey will inform discussions at the central bank's next rate-setting meeting on July 31-Aug. 1. The Fed has raised rates twice this year in response to strong growth, low unemployment and a slight rise in inflation.

The last rate hike occurred in June and at that time, the Fed moved its projection for future rate hikes this year from three up to four.

Many analysts believe the Fed will leave its benchmark rate unchanged in a range of 1.75 percent to 2 percent at the upcoming meeting but will hike rates again in September and December.

Powell's comments during his two days of testimony supported that view. He gave an upbeat assessment of the economy's prospects while citing rising trade tensions as a risk to the Fed's optimistic outlook.

During more than three hours of testimony before the House panel on Wednesday, Powell heard widespread criticism from both Democrats and Republicans about the adverse effects Trump's punitive tariffs were having on businesses and farmers in their districts.

Powell tried to avoid denouncing Trump's get-tough approach while still endorsing the benefits of free trade.

In response to one question, Powell said, "The bottom line is that a more protectionist economy is an economy that is less competitive, less productive. We know that. It is not a good thing if this is where it goes."

But Powell said that the administration believes that its imposition of penalty tariffs against China and other countries will eventually end up forcing those countries to negotiate for lower tariffs.

"If this results in a more protectionist world, that would be bad for our economy and the world economy," Powell said. "That is not what the administration says it is trying to achieve."

A number of lawmakers praised Powell for his efforts to avoid economic jargon in explaining Fed policy and for his willingness to meet with individual lawmakers.

Powell, the first non-economist to head the Fed in nearly four decades, said his goal is to speak so that he can be understood not just by economists and Wall Street investors but also by the typical household.

He noted that he has already announced he will double the number of press conference he holds each year from four to eight — one after every Fed meeting starting next year

"We owe you, and the public in general, clear explanations of what we are doing and why we are doing it," Powell said in his testimony. "Monetary policy affects everyone and should be a mystery to no one."

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