Fed Minutes: Trade War Could Have 'Significant Negative Effects' On US Economy

On Wednesday, the Federal Reserve reiterated its previous stance that its July interest rate cut was a “midcycle adjustment,” implying the U.S. economy is on stable footing and there is no set schedule for future rate cuts.

What Happened?

The Fed released its July meeting minutes, and its language on the economy was relatively bullish given recent elevated fears of a U.S. recession. The Fed reiterated its previous intentions to let economic developments dictate near-term monetary policy actions rather than setting a specific course.

“A number of participants suggested that the nature of many of the risks they judged to be weighing on the economy, and the absence of clarity regarding when those risks might be resolved, highlighted the need for policymakers to remain flexible and focused on the implications of incoming data for the outlook,” the Fed said in its minutes.

The Fed mentioned trade war tariffs as a drag on the economy.

“Participants generally judged that the risks associated with trade uncertainty would remain a persistent headwind for the outlook, with a number of participants reporting that their business contacts were making decisions based on their view that uncertainties around trade were not likely to dissipate anytime soon.”

The Fed also said the trade tensions and international economic slowdowns could have “significant negative effects on the U.S. economy.”

Why It’s Important

The minutes come after the Federal Reserve last month issued its first 0.25% interest rate cut since 2008. The Fed also decided to end its balance sheet asset sales prior to its previous September target date.

The Federal Reserve has been under pressure all year from President Donald Trump to cut interest rates, raising concerns about the Fed’s independence.

On Wednesday, Trump once again tweeted about the Fed after Germany auctioned off 30-year bonds with 0% yields.

“So Germany is paying Zero interest and is actually being paid to borrow money, while the U.S., a far stronger and more important credit, is paying interest and just stopped (I hope!) Quantitative Tightening. Strongest Dollar in History, very tough on exports. No Inflation!.... WHERE IS THE FEDERAL RESERVE?” Trump tweeted.

Markets React

The SPDR S&P 500 ETF Trust SPY traded higher by 0.7% after the Fed minutes reassured investors that the economy is on solid footing and the Fed is willing to act with additional rate cuts if needed.

The yield on 10-year U.S. Treasury bonds rose slightly on Wednesday to 1.572%, still near its lowest level since late 2016.

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Photo credit: Dan Smith via Wikimedia Commons