Today’s Fed Minutes

Today, the US Federal Reserve decides to raise rates for the second time of this year, only one day before the US and China officially start to impose high tariffs on each other’s exports. The Fed stays bullish on the US future economic performance, given the acceleration of job creation and income growth. However, it does not mean that the Fed ignores the effect of the trade war between the US and other countries. Some businesses pointed out to the Fed that they have scaled back their investment in increasing capacity, and the Fed recognises that the increasing prices in steel and aluminium due to the tariffs will have potential negative impacts on the US economy. But the Fed does not give its estimation about the impact of tariffs on the US economy in general, and only pointed out the range of the impact is “particularly wide”.

In the short term, the range of the trade war’s impact I think is rather narrow. The only outcome of the trade war between two major economies in the world can only result in a seriously negative impact on the global economy. The current trading and manufacturing system is a globalised network that most products are produced via cooperation between multiple countries; therefore, the impact is not only restricted within these two economies. However, on the long term, the range of the impact is like what the Fed concluded, particularly wide. There are many possible outcomes of the trade war, and each outcome will bring a different impact on these two economies individually as well as the global economy. Though the range of the impact is particularly wide, it is not good news for the global economy, as it indicates a high uncertainty (as the variance is big by its definition).

Overall, I still think that the US Fed has been a bit too optimistic and the decision of the second rate hike could be problematic as the businesses have already been starting to cut their investments.