Markets around the world are jittery. President Donald Trump is approaching an important deadline to extend the truce in his trade war with China. The situation has raised concerns about the potential impact on the U.S. economy and the Federal Reserve’s interest rate policy. As Trump prepares for a meeting with Russian President Vladimir Putin on Friday, the uncertainty surrounding the trade negotiations looms large.
Last Thursday, the U.S. government began imposing higher import taxes on various goods from multiple countries, marking a significant escalation in trade tensions. This development follows an agreement between Trump and Beijing to temporarily halt the imposition of additional, triple-digit tariffs in May. Both sides are required to try and negotiate in good faith for 90 days. These negotiations aimed to address decades-old trade barriers. After recent events, particularly the announcement of appointment of paid lobbyists, skepticism has grown about the fate of these talks.
As recently as last month, officials from each country gathered in Stockholm for the most recent round of negotiations. For their part, they felt hopeful about addressing the matter. The meeting concluded without any specific commitment or statement from Trump. He declined to say whether the truce would be extended again after 90 days. As the Tuesday deadline looms, investors and market analysts are hanging on a knife’s edge watching for new details from the White House.
Combined with the imposition of higher tariffs, these actions have sounded warnings about possible consequences for the U.S. economy from acute shortfalls in semiconductor supply. Economists are concerned that continued trade disputes may dampen business investment and consumer spending. Fears about tariffs may figure into the Federal Reserve’s decision-making on interest rates. This new pressure could make some painful monetary policy choices unavoidable in coming months.
One of the biggest worries is the effect of long-lasting tariffs on inflation and economic growth. Repair costs would skyrocket. Higher import taxes would dramatically raise prices for consumers. These conditions could force the Federal Reserve to reconsider its hawkish stance on interest rates. As we go into 2020, economists are raising alarm that further escalation in the trade war would have considerable economic costs. In turn, the Federal Reserve should proceed with more caution.
As Trump prepares to meet with Putin in Alaska, many observers are curious about how this meeting might affect broader international relations and trade policies. The relationship between the U.S. and China remains critical, not only for bilateral trade but for global economic stability.
