Fed Researchers Find Trade Policy Uncertainty a Drag on Growth

Trade-policy uncertainty is holding back global economic growth and may weigh on the world economy into 2020, according to a Federal Reserve research note that puts some hard numbers on an argument the U.S. central bank has made for months.

The rise in trade conflicts in the first half of 2018 “accounts for a decline in the level of global GDP of about 0.8% by the first half of 2019,” Dario Caldara and his four co-authors conclude in the note posted on the Fed’s website on Sept. 4.

“Had trade tensions not escalated again in May and June 2019, the drag on GDP would have subsequently started to ease,” they add. “However, renewed uncertainty since May of 2019 points to additional knock-on effects that may push down GDP further in the second half of 2019 and in 2020.”

President Donald Trump’s threat in late May to impose tariffs on Mexico, unless it stemmed illegal immigration over the U.S. border, rattled financial markets.

Trade Costs

Chairman Jerome Powell cited trade-policy uncertainty and weak global growth as he explained the Fed’s July 31 decision to lower interest rates by a quarter percentage point, with investors fully pricing another such move when policy makers meet later this month.

The research note marks an attempt by the Fed to quantify the costs of a redrawing of the global trading regime by the U.S. and other nations. It also pushes back against Trump’s campaign to shift the blame for financial market volatility and perceived risks to the economy away from the trade war and onto the U.S. central bank.

The president blasted the Fed in a series of tweets for doing “NOTHING!” about a strengthening U.S. dollar, saying that it hurts American exporters. He also claimed, “We don’t have a tariff problem (we are reigning in bad and/or unfair players), we have a Fed problem. They don’t have a clue!”

https://www.bloomberg.com/news/articles/2019-09-05/fed-researchers-find-trade-policy-uncertainty-a-drag-on-growth?srnd=economics-vp

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