Fed Minutes: Concerns Of “Consequential Downside Risk” Of Tariffs, Asset Values

The 12-page minutes of the FOMC Aug 1 meeting discuss jobs, inflation, tariffs, GDP, and the overall economic outlook.

Inquiring minds are slogging through Minutes of the Federal Open Market Committee July 31–August 1, 2018, released today.

The report is mostly a rah-rah about jobs, GDP and inflation with some downside and upside risks noted. Emphasis is mine.

The feature image is from the WSJ article Fed Signals Rate Increase at Next Month’s Meeting

The snips are from the FOMC Minutes.

Above Trend Growth

In the U.S. economic forecast prepared for this FOMC meeting, the staff continued to project that the economy would expand at an above-trend pace. Real GDP was forecast to increase in the second half of this year at a pace that was just a little slower than in the first half of the year.

On the upside, household spending and business investment could expand faster over the next few years than the staff projected, supported in part by the tax cuts enacted last year.

On the downside, trade policies could move in a direction that would have significant negative effects on economic growth.

Inflation

The upside risk that inflation could increase more than expected in an economy that was projected to move further above its potential was counterbalanced by the downside risk that longer-term inflation expectations may be lower than was assumed in the staff forecast.

Fiscal Policy

[Participants] generally continued to see fiscal policy and the strengthening of the labor market as supportive of economic growth in the near term. Some noted larger or more persistent positive effects of these factors as an upside risk to the outlook.

A few participants indicated, however, that a faster-than-expected fading of the fiscal impetus or a greater-than-anticipated subsequent fiscal tightening constituted a downside risk.

Trade

Most expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity.

All participants 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.