BREAKINGVIEWS-Trade war storm buffets the Fed ever harder

By Gabriel Rubin

WASHINGTON, July 30 (Reuters Breakingviews) - Federal Reserve Chair Jerome Powell now faces dissent within and without. For the first time in three decades, two members of the interest rate-setting Federal Open Market Committee registered their disagreement with a decision to hold steady rather than cut. It comes as President Donald Trump is already pushing furiously for monetary easing. The tenuousness of Powell’s position doesn’t change the fact that he is right to wait, for now at least: as trade war impacts begin to be felt and new escalations arise, the inflation outlook faces real risks, making a go-slow strategy the best of bad options.

The Fed chair held a press conference on Wednesday hours after GDP figures showed a 30% plunge in goods imports for the second quarter and an inverse move in inventories. It’s a mirror image of the prior three months, when companies frantically built stockpiles ahead of historically high tariffs, resulting in a healthy-looking 3% pace of expansion. Yet year-over-year consumer spending growth halved from last quarter to 1.2%, and business investment outright declined. It's akin to what "The Simpsons" dubbed “Three Stooges Syndrome:” a range of odd maladies hitting at once that precariously cancel each other out.

Meanwhile, any relief from the ill-defined trade deals the Trump administration struck with Japan and the European Union is tempered by new threatened 25% tariffs on India, hiked duties on Brazil, and 50% levies on copper. The breakdown in talks with India, the United States’ 10th-largest trading partner, is perhaps the most ominous sign, suggesting that at least some major tariffs comparable to those announced on “liberation day” in April could stick around.

Trump’s expanding reasons to threaten tariffs – whether punishment for buying Russian oil or, in Brazil's case, prosecuting a former president over an attempted coup – also suggest little chance of respite. The burden is now concrete for U.S. companies: in a Wednesday call with reporters, automaker Ford Motor F.N pegged tariff costs at $800 million for its second quarter. The hit comes from proliferating duties on parts but also domestically produced aluminum, which relies on imported raw materials.

Powell alluded to the risk that a tariff-based shock would spiral into sustained price increases, blaming them for elevated consumer inflation expectations. Yet as his term draws to a close next year, he faces more presidential pressure to ignore these increasingly visible warning signs than any Fed chairman in a half-century. That those signals clash with decent headline growth and employment makes this task even harder and the future tougher to predict. Rather than risk tripping over these obstacles, it made sense to stand pat.

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CONTEXT NEWS

The U.S. Federal Reserve maintained its target for the key federal funds rate at a range of between 4.25% and 4.5% at a meeting held from July 29 to July 30, though two members of the Federal Open Market Committee dissented from the decision for the first time in over 30 years.

U.S. President Donald Trump on July 30 said he would impose a 25% tariff on goods imported from India starting August 1, as well as an unspecified penalty for buying Russian arms and oil, as negotiations between the two countries falter. The White House also announced a 50% levy on copper and increased duties on Brazil.