OK, let’s get away from John Brennan, and public view of Russia, and get back to something uncontroversial only by comparison – President Trump’s tariff-heavy trade policies. (Don’t worry – I’m sure I’ll get to the Trump-related Michel Cohen and Paul Manafort legal results as soon as I can figure out something distinctive to say about them.)
As known by RealityChek regulars, the national media has been filled with articles reporting that Mr. Trump’s actual and threatened tariffs on aluminum and steel, and on products from China, have already started backfiring on the U.S. economy in any number of ways: leading to job and production cuts in industries that use the two metals as key inputs, and creating major uncertainty throughout the economy among sectors dependent on Chinese products as parts, components, and materials for their goods, and on selling Chinese final products to consumers.
The official U.S. data on economic growth and employment, as I’ve reported, have shown that, so far, exactly the opposite has been true for the metals-using industries. Yesterday afternoon, another important indicator was made public that casts major doubt that the economy is currently experiencing a “trade-mageddon,” or is bound to any day now. I’m referring to the minutes of the July 31-August 1 meeting of the Federal Reserve’s Federal Open Market Committee (FOMC) – the members of the central bank’s board of governors who vote on monetary policy.
Most Mainstream Media newspaper headlines claimed that latest version of these minutes – which contain separate detailed analyses of the nation’s economic and financial situation by the FOMC members and the Fed’s staff of economists alike – contained sobering warnings about the “escalating trade war” posing “a big threat” to the current American recovery. And the members (I’ll focus on their analysis, given that they actually decide on the Fed’s moves) did definitely express trade-related concerns. Here’s how they put it:
“all participants [FOMC members] pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risks. Participants observed that if a large-scale and prolonged dispute over trade policies developed, there would likely be adverse effects on business sentiment, investment spending, and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households. Further negative effects in such a scenario could include reductions in productivity and disruptions of supply chains. Other downside risks cited included the possibility of a significant weakening in the housing sector, a sharp increase in oil prices, or a severe slowdown in EMEs [emerging market economies].
But here’s what the members also said:
>Despite the above concern about consumer purchasing power suffering from tariff hikes, “Indicators of longer-term inflation expectations were little changed, on balance.”
>Several members commented that “prices of particular goods, such as those induced by the tariff increases” would likely fuel some “upward pressure on the inflation rate” but that these pressures would be “short-term” and had multiple causes. Further, depressed agricultural prices – due partly to recent trade developments, as noted below – would exert downward pressure on domestic inflation.
>Despite concerns about the impact of trade-induced uncertainty, “incoming data indicated considerable momentum in spending by households and businesses” and that levels of household and business confidence (regarded as key forward looking economic indicators) remained “high.”
>“Business contacts in a few Districts reported that uncertainty regarding trade policy had led to some reductions or delays in their investment spending.” Yet “a number of participants indicated that most businesses concerned about trade disputes had not yet cut back their capital expenditures or hiring….” And the possibility that prolonged trade tensions would change this picture was only described as a possibility.
>Although “Several participants observed that the agricultural sector had been adversely affected by significant declines in crop and livestock prices over the intermeeting period,” some FOMC members observed that this deterioration only “likely” and “partly flowed from trade tensions.”
And perhaps most important, the FOMC members “viewed the recent data [including trade-related information] as indicating that the outlook for the economy was evolving about as they had expected” and that their stated determination to raise the federal funds rate gradually, in order to sustain the expansion but discourage economic overheating, remained fully intact.
As the Fed participants always say, their analyses and policy decisions will be data-dependent. But it’s clear that the real message of these minutes is that the data justify no trade war-related alarmism now, and little for the foreseeable future.