Benefits Of China Trade Truce 'Limited': Fed Officials

While US trade tensions with China have receded, Federal Reserve officials worry the danger to the economy is not over, according to minutes of the last policy meeting released Wednesday.

President Donald Trump last month signed a "phase one" agreement with Beijing which prevented some of the most damaging tariffs from taking effect, but punitive duties remain in place on about two-thirds of goods traded between the world's dominant economic powers.

The truce with China, as well as the new continental free trade pact with Mexico and Canada, "helped reduce downside risks and appeared to buoy business sentiment," central bankers said in the minutes from the January 28-29 policy meeting.

But several officials cautioned that the impact of the deal with China "would be relatively limited."

Uncertainty over trade policy "is likely to remain elevated, with the possibility remaining of the emergence of new tensions as well as the re-escalation of existing tensions," according to the minutes.

And officials noted that the China deal "would still leave a large portion of the tariffs in place and that many firms had already been making production and supply chain adjustments."

Trump's trade confrontations have included tariffs on steel and aluminum, on top of hundreds of products from China, drawing retaliation against US products and fueling a decline in American manufacturing last year.

The frictions, marked by Trump's sharp policy gyrations and threats, have shaken the business sector, which have put investments on hold or shifted production to try to avoid excessive duties. US exports and imports declined in 2019.

With the China deal, Washington canceled a damaging round of new US tariffs on $160 billion in imports that were due to start in mid-December, and promised to slash in half the 15 percent tariffs on $120 billion of consumer goods like clothing imposed September 1.

But the average US tariff on China over the course of the trade war surged from three percent at the beginning of 2018 to more than 19 percent, according to economists.

The International Monetary Fund warned trade conflicts and tariffs cut eight-tenths off world growth, and on Wednesday said the truce with China could "reduce the drag" by 0.2 percent, but added that the global economy remains fragile and beset by uncertainty.

The US central bank cut the benchmark lending rates three times last year in an effort to buoy the economy as it was shaken by Trump's multi-front trade wars.

But the policy-setting Federal Open Market Committee last month left the key interest rate steady in the target range of 1.5-1.75 percent, and indicated it was unlikely to move again unless there was a "material change" to the outlook.

Fed officials said the risk of a US recession in the next year has "fallen notably," according to the minutes.

They were "cautiously optimistic" the easing of tensions would "boost business confidence or raise export demand which would help strengthen or at least stabilize business investment."

But a few officials highlighted continued challenges for American farmers -- hit hard by Chinese retaliation -- despite subsidies provided by the government.

Farmers also are due to benefit from the trade deal with China, as Beijing pledged to buy an additional $200 billion in farm goods over two years.

The outbreak of the new coronavirus in China, which has killed more than 2,000 people so far, is another source of uncertainty for the global economy that had shown signs of stabilizing, the Fed said.