Powell indicates openness to rate cut to fight effects of Trump trade wars

Federal Reserve Chairman Jerome Powell said Tuesday that the central bank is ready to respond if President Trump’s trade wars with China and Mexico hinder the U.S. economy.

Powell said that the Fed is “closely monitoring” the impact of new and proposed tariffs on China and Mexico, and may be forced to respond if they harm employment or price stability.

“We do not know how or when these issues will be resolved,” Powell said at a Fed policy conference in Chicago.

“We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”{mosads}

Powell’s comments come as Fed-watchers and investors see rising odds of the central bank cutting rates to buffet economic headwinds from Trump’s trade wars

The president rattled markets last Thursday when he announced he would impose a 5 percent tariff on all Mexican imports until it halts illegal immigration and drug trafficking into the U.S. The tariff would take effect on June 10 and increase monthly by 5 percentage points until it reaches 25 percent.

Trump’s tariff threat on Mexico came just weeks after he increased tariffs on $200 billion in Chinese goods from 10 to 25 percent, and threatened to impose import taxes on roughly $300 billion more in products from China.

Economists have warned that Trump’s proposed tariffs amount to a massive working- and middle-class tax-hike that could slow or even halt U.S. economic growth. The U.S. economy already had been expected to slow in 2019, and analysts at JP Morgan and Morgan Stanley said last week the country faces higher odds of a recession before the 2020 election.

The impending risks of Trump’s tariffs, along with persistently low inflation, have boosted Wall Street’s expectations of a Fed rate cut.

James Bullard, president of the Federal Reserve Bank of St. Louis, said in a Monday speech that “a downward policy rate adjustment may be warranted soon.”

Consumers are likely to face higher costs for hundreds of basic necessities and household products due to Trump’s proposed tariffs on Chinese and Mexican goods. Import taxes on Mexican products would also raise prices for groceries and gasoline, stressing low- and middle-income household budgets.

The U.S. also faces economic risks from retaliation to Trump’s tariffs. China on Saturday finalized higher tariffs on $60 billion in U.S. agricultural goods, squeezing the already ailing American farm sector.

While higher tariffs on U.S. farm goods could reduce food prices, they would pose severe financial risks to family farms. Prolonged pain in the U.S. agricultural sector may also lead to declines in equipment sales, shipping and trucking.