Fed needs time to weigh trade war impact

Bloomberg

Federal Reserve Bank of Boston President Eric Rosengren said it’s too early to tell whether the escalating trade war and the resulting financial market reaction will last long enough to hurt the US economy and alter monetary policy.
“It’s a little premature to think about the outlook” for the economy, Rosengren said in an interview in Boston. “This is a temporary tax increase on imported goods, the full impact of which occurs on June 1. We don’t even know if there’ll be an agreement between now and the end of this month.”
US stocks and commodities tumbled after China retaliated with higher tariffs on a range of American goods in response to the US last week slapping punitive levies on $200 billion of Chinese imports.
Rosengren acknowledged that if new tariffs persist they could eventually weigh on growth and contribute to higher inflation. Not only would prices on many imported goods rise, but companies competing with those goods might take advantage of the situation to raise their own prices, he said. Many firms producing goods in the US are already under pressure to increase prices because of rising wages amid the lowest levels for unemployment in almost 50 years.
“This potentially has some persistence particularly in a tight labour market where the ability to be raising prices in this environment may be greater than in an environment where we have a lot more slack in the labor market,” he said.
Rosengren also discussed the Fed’s ongoing review of its monetary policy framework, which was prompted by worries over the long-term trend of inflation running below the Fed’s 2% objective. Some officials have proposed adopting a so-called make-up strategy that would deliberately aim for above-target inflation for a period following a persistent under-shoot.
“We’ve made a promise to look at things, not to change things,” Rosengren said. “We may change things if the benefits outweigh the costs.’’
For the Fed to adopt a new strategy it would require “fairly strong evidence that it makes sense,” he said.
Rosengren emphasised the Fed had made significant changes to its policy framework in the past, for instance by abandoning the practice of targeting certain measures of aggregate money supply. The difference this time is that the central bank is conducting a more deliberate and open process as it considers the options.
“We shouldn’t assume there’s going to be a change. Just because you found a problem doesn’t mean you have a cost-effective solution,” he said. “At the some time just because it may not be as easy as you think doesn’t mean you should never make a change.”

‘Central banks should prepare for slow growth’
Bloomberg

Monetary policy makers around the world should review their strategies to prepare for a future of slow economic growth and low interest rates, Federal Reserve Bank of New York President John Williams said.
“Central banks should revisit and reassess their policy frameworks, strategies, and toolkits, to maximise efficacy” in a world where low investment and high savings put a lid on interest rates, Williams said on Tuesday in remarks prepared for a panel discussion in Zurich. “Absent such changes, central banks will be severely challenged to achieve stable economies and well-anchored inflation expectations.”
Williams pointed to a review the Fed is undergoing this year of its own monetary policy strategy. While the unemployment rate is at a five-decade low, inflation is also still below the Fed’s 2% target, as it’s been throughout most of the current expansion, and survey measures of inflation expectations are sliding too.
Fed officials have kept rates on hold since December amid low inflation and global growth concerns, which could return to the fore following an escalation in trade tensions between the US and China. Investors now see a good chance of a rate cut later this year.
“Given the limited policy space for interest rate cuts in future downturns, recoveries will be slow and inflation below target,” Williams said. “The limitation in the ability of central banks to offset downturns results in an
adverse feedback loop, whereby expectations of low future inflation drag down current inflation and further reduce available policy space.” The New York Fed chief also called for fiscal policy changes to help com-
bat future economic down-
turns, like stronger automatic stabilisers and greater coordination between the Fed and Treasury on debt management.