Fed chief works to manage trade war effects
WASHINGTON — After the Federal Reserve cut interest rates Wednesday for the first time in a decade, Chairman Jerome Powell made a striking acknowledgement: In the Trump era, the Fed faces a steep learning curve.
The Fed is supposed to set interest rates based on gauges of inflation and employment. But President Donald Trump has injected a wild card into the mix with his combative trade wars and tariffs on imports. The resulting economic uncertainties, Powell said, had significantly influenced the Fed’s decision to cut rates.
“Trade is unusual,” the Fed chairman told reporters at a news conference Wednesday. “There isn’t a lot of experience in responding to global trade tensions. So it is something that we haven’t faced before and that we are learning by doing.”
Compounding the problem is that cutting loan rates — especially when they’re already low — isn’t likely to ease uncertainties from a prolonged trade conflict.
A survey by the American Chamber of Commerce in South China has found that U.S. manufacturers suspended nearly half their investment projects valued above $250 million because of uncertainty in U.S.-China trade relations. Powell acknowledged that some companies have delayed investments because of the tariffs, but he didn’t make a case for why a rate cut might cause some of them to reverse course.
To be sure, other, more conventional factors played a role in the Fed’s decision to cut rates Wednesday — a move that Powell characterized as “a bit of insurance” to help sustain the longest U.S. expansion on record. Weak global growth and inflation that remains persistently below the Fed’s target level were also factors in cutting the benchmark rate by a quarter-point to a range of 2% to 2.25%.
The central bank also announced that it would stop shrinking its enormous bond portfolio in August, two months earlier than previously planned. This is intended to help keep long-term borrowing rates low for consumers and businesses.
