Will the Fed Pause Rate Hikes as Trade Concerns Escalate Further?

The Fed has addressed the escalation of trade disputes on many occasions, but in its latest policy minutes, the committee sounded much more concerned about the ongoing trade disputes and their probable further escalation.

According to the meeting minutes, most Fed members “expressed the view that an escalation in international trade disputes was a potentially consequential downside risk for real activity.”

Officials also mentioned that given the complex nature of trade issues, it’s “a challenge” to determine the appropriate policy response. They also noted that uncertainty regarding trade policy has led to some reduction and delays in business investment spending while putting pressure on input prices.

Market participants are convinced that rates are going up in September. The outlook for rates beyond that has, however, become murky given the trade war concerns. If trade tensions become severe, the Fed might have to pause in December.

While midlevel trade talks are ongoing between the United States (SPY) and China, the United States still proceeded to levy 25% tariffs on $16 billion worth of Chinese imports, and China (MCHI) responded with retaliatory tariffs worth the same amount on goods from the United States. Moreover, the market isn’t expecting the current talks to yield anything significant in terms of a resolution. In addition, the Trump administration is considering widening the ambit of tariffs to include another $200 billion worth of Chinese imports.

Apart from the Fed, many companies have also started to feel the heat from trade dispute escalations. According to Reuters, companies such as Amazon (AMZN), Facebook (FB), and Alphabet (GOOG) have mentioned that the proposed tariffs could disproportionately harm the interests of American Internet companies.

If these concerns become more severe and business investment actually starts slowing down, the Fed might rethink the path of its rate hikes, which would be detrimental to the US dollar (UUP) but positive for gold prices (GLD). Higher interest rates reduce gold’s appeal, as it doesn’t yield anything in terms of income.