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Federal Reserve officials have warned that the loss of the US’s safe-haven status triggered by President Donald Trump’s global trade war could have “long-lasting” effects on the country’s economy.
Minutes from the Federal Open Market Committee’s early May vote, published on Wednesday, indicated that some rate-setters focused on the fall in prices for US government debt, equities and the dollar in the weeks after the president announced sweeping tariffs on trading partners.
“These participants noted that a durable shift in such correlations or a diminution of the perceived safe-haven status of US assets could have long-lasting implications for the economy,” the minutes said.
The early May FOMC meeting was the first after the turmoil that followed Donald Trump’s “liberation day” tariff announcements on April 2.
The falls in stocks and treasuries, combined with the dollar’s depreciation, broke with historical trends and sparked concern that Trump’s policies were leading global investors to ditch the dollar and US assets.
Global investors have historically flocked to — not away from — US assets in times of market volatility.
The FOMC minutes did not speculate on what the implications for the US economy could be if it lost its status as a perceived safe haven.
Phillip Swagel, director of the non-partisan Congressional Budget Office, told the Financial Times this month that a shift in capital flows away from the US would dent growth, hit jobs and raise government borrowing costs.
The minutes also showed that Fed officials thought Trump’s trade war had raised the chances that inflation would remain above the central bank’s 2 per cent goal.
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“Almost all participants commented on the risk that inflation could prove to be more persistent than expected,” the minutes said.
The meeting, which saw the FOMC hold its benchmark target at between 4.25 and 4.5 per cent, took place before Trump lowered tariffs on China from 145 per cent to 30 per cent. The détente between the world’s two largest economies lifted the prices of stocks, government debt and the dollar.
The FOMC next meets in mid-June.
Rate-setters continue to signal that they will not resume rate cuts until they are confident that the tariffs will not have an enduring impact on US prices.
