Federal Reserve officials are certain to bring up news of planned U.S. tariffs when they meet in two weeks, but the discussions are more likely to intensify later in the year as the details become more concrete.
So far, several Fed officials have said they are taking a wait-and-see approach on President Donald Trump's planned tariffs on steel and aluminum imports, though a few have said they are worried the tariffs could hold back growth, particularly if countries retaliate against other U.S. products.
Analysts say it is yet another complication that Fed officials will have to consider as they revise their outlooks, noting that the Fed was already facing uncertainties about the effects of tax cuts and unusually tight labor markets potentially driving up inflation. Although some at the Fed are already voicing concerns, Ryan Sweet of Moody's Analytics said it will take time for them to fold the trade news into their growth outlook, as they "don't want to get whipsawed by changes."
"Right now, I don't think the Fed is re-thinking their approach," he said. "They're likely waiting for pen to be put to paper. Right now, it's just a lot of trade rhetoric."
New York Fed President William Dudley has perhaps been the most vocal in his criticism, saying last week in a planned speech in Brazil that a protectionist approach is "destructive" over the long term. Raphael Bostic, the president of the Atlanta Fed, piled on March 7, saying a possible trade war could force the Fed to slow its path of interest rate hikes as growth prospects weaken, according to Bloomberg News. However, Fed Governor Lael Brainard said it is not yet clear whether the trade news would affect her outlook.
Nothing has been set in stone yet. The Trump administration has said it will carry on with the tariffs — which consist of 25% on steel imports and 10% on aluminum imports — though it has opened the door to exempting some countries. The European Commission has signaled products it could retaliate against, such as bourbon and Harley-Davidson Inc. motorcycles, and most recently said it could target peanut butter and cranberries. Trump has responded to those volleys by threatening tariffs on European cars.
Scott Anderson, chief economist at Bank of the West, said those "tit-for-tat" responses could pose a challenge to the Fed if they escalate enough. Consumers, he said, would see higher prices as producers pass on the increased costs of making their products.
The effects would depend on how many tariffs are implemented and how severe they are, he said, adding there are few signs so far they would be a "huge hit to consumers."
"We're obviously not in that territory at this point, but certainly there are more risks out there," he said.
Those include, for instance, the possibility that the U.S. could pull out of the North American Free Trade Agreement if the current negotiations stall. Also on that list is the potential that the U.S. may add more tariffs on Chinese products if a pending Trump administration review finds that China violated intellectual property protections.
Paul Ashworth, chief U.S. economist at Capital Economics, wrote in a research note that the protectionists among Trump's administration "appear to be ascendant again" with the resignation of Gary Cohn as Trump's top economic adviser.
"We would be wary of dismissing the proposed steel and aluminum tariffs as just another small-scale isolated action that doesn't signal any broader shift in trade policy," he wrote. "This could mark a genuine turning point."
