* Trump's tariffs announcement poses headache for Fed* Markets still betting on U.S. interest rate hike in MarchBy Howard Schneider and Ann SaphirWASHINGTON, March 2 (Reuters) - The Federal Reserve digestedthe Trump administration's massive tax cuts and plan to boostspending with barely a hiccup, but Washington's sudden push forsteep tariffs on steel and aluminum imports could saddle theU.S. central bank with the worst of both worlds - risinginflation and a slowing global economy.
The combination of fiscal stimulus, which Fed officialsviewed as hardly a game-changer for monetary policy, and abrewing trade war is a recipe for the sort of no-win situationcentral bankers faced in the 1970s when they had to stomach highinflation or run the risk that interest rate increases wouldtrigger a recession.
The tariffs that President Donald Trump said he plans tolevy next week, and the global reaction to the announcement,punctured what had been a fairly calm and even bullish pictureof the U.S. economy outlined by Fed Chairman Jerome Powellduring testimony in Congress this week.The central bank will now have to factor in themacroeconomic impact of the tariffs, which is expected to besmall in itself, but also the broader risk of globalretaliation, government-imposed price pressures on a variety ofgoods, and an ebbing of world trade.
Canada, Brazil and the European Union have alreadythreatened countermeasures, representing what economists referto as a "deadweight loss" to global welfare. The InternationalMonetary Fund on Friday said Trump's move likely would damagethe U.S. economy as well as the economies of other nations."What you have to worry about is that this startsgovernments globally down the path of protectionism and tradewars," said Ward McCarthy, chief economist at investment bankJefferies. "If that's where this goes, it's very bad foreconomic growth ... It would really complicate and confuse thepicture."Much is uncertain. The tariffs - 25 percent on steel and 10percent on aluminum - have not been imposed, though Trump haspromised that they will be.That was enough to send U.S. stocks reeling on Thursday andearly on Friday. They recovered some losses on Friday afternoon,but the Dow Jones Industrial Average was still down about2.5 percent over the two days while the broader S&P 500 index had shed about 1.6 percent. RIPPLE EFFECTSIt is not known how broad a set of countries the tariffswould reach, or how dramatically those countries might react.Though the White House seemed initially dismissive of therisks, with Trump tweeting on Friday that "Trade wars are good,and easy to win," the tariffs could undermine some of theeconomic benefits arising from the overhaul of the U.S. tax codelate last year.The primary metals makers and the 373,000 workers in thoseindustries who would most benefit from the tariffs account for asmall slice of gross domestic product though they aregeographically concentrated in politically important areas.About 40 percent of those jobs are in five states. Three ofthem are Ohio, Pennsylvania and Michigan, which formed much ofthe backbone of Trump's 2016 election win and are seen as key toRepublican fortunes in congressional elections later this year.The ripple effects, however, will be nationwide.
The profits of corporations that use steel could be dented,causing them to hold back on the investments or wage increasesthe White House says would flow from lower corporate taxes. Inan age when carbon fiber is used on airplane wings and consumerproducts like bicycles, raising the price of aluminum and steelmay boost demand for substitutes or research into alternatives.
How it all shakes out, domestically and globally, isunpredictable, according to economists and other observers."Make no mistake, the risk of inflation reaching 4 percentor more is real, and that will force the Fed to act much moreaggressively in tightening monetary policy," said BernardBaumohl, chief global economist at the Economic Outlook Group."Given this business cycle is already long in the tooth,these are the kinds of policy blunders that could easily bringthis expansion to quick end," Baumohl said.The Fed may be able to suspend judgment for a while. Thecentral bank is expected to raise interest rates at its policymeeting in March, and following the tariff announcementinvestors do not seem to have changed their expectations forthat to proceed.But moving past that meeting, should protectionism becomethe mood of the day, the Fed's hope for a "soft-landing" era offull employment and on-target inflation may instead become achoice of which bad outcome to tolerate - rising prices orhigher unemployment.
"The real worry is that this marks a turning point in U.S.trade policy, away from bluster and brinkmanship towards actualprotectionist measures. We have consistently warned that thiswould become more likely as the mid-term and presidentialelections approach," Andrew Kenningham, chief global economistfor Capital Economics, wrote on Friday. "If so, President Trumpmay discover that, contrary to his tweet this morning, there arerarely any winners from trade wars."<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^GRAPHIC-U.S. steel products imports ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Ann Saphir in San Francisco and Howard Schneiderin WashingtonAdditional reporting by Makini Brice in WashingtonEditing by Paul Simao)
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