U.S. economy expands modestly but trade tensions weigh, Fed survey shows

By Lindsay Dunsmuir

WASHINGTON (Reuters) – The U.S. expanded at a modest pace through the final six weeks 2019 but uncertainty U.S. trade policy continued to hurt firms, a survey conducted by the Federal Reserve said Wednesday.

“In many districts, tariffs and trade uncertainty continued to weigh on some businesses,” the Fed said in its report, compiled from anecdotal evidence derived from contacts across the country.

U.S. President Donald and Chinese Vice Premier Liu He signed an initial trade deal at the White House earlier on Wednesday after 18 months of tit-for-tat tariffs between the world’s two largest economies that has uprooted supply chains and slowed global growth.

The Fed cut interest rates three times last year, reversing course after three years of periodic rate hikes. Fed Chair Jerome Powell characterized the rate cuts as insurance against slowing global growth, the trade tensions and moderate inflation in order to keep the longest economic expansion on record going.

Fed policymakers have since made plain they intend to keep interest rates unchanged for the foreseeable future, citing a boost to the economy from last year’s cuts and the easing of tensions in the U.S.-China trade war.

But Fed policymakers have warned the partial trade deal will not eliminate businesses’ concerns as U.S. tariffs on China are set to remain in place until a “Second Phase” deal is signed.

The latest Fed snapshot of the economy showed that before the deal was signed, many districts were still suffering. The Richmond Fed reported that many manufacturers in its district cited the trade tensions as a major worry.

“Several increased prices of final goods but struggled low profit margins due to tariffs on raw materials,” the report said.

However, the prospect of a deal had also spurred some hope. The Chicago Fed district said it had “boosted farmers’ outlooks” while the Dallas Fed said “outlooks generally improved, with reduced trade uncertainty boosting optimism.”

Elsewhere in the report, inflation pressures remained relatively subdued with prices rising at a modest pace. Wage growth was described as modest to moderate in most districts despite an unemployment rate near a 50-year-low and businesses reporting widespread labor shortages.

Many at the Fed have grown increasingly concerned that inflation expectations may be slipping. The central bank targets a 2% inflation rate, but has consistently undershot it since the goal was introduced in 2012.

U.S. consumer prices rose slightly less than expected in December and monthly underlying inflation pressures retreated, the Labor Department reported on Tuesday.

The Beige Book was prepared by the New York Fed with information collected on or before Jan. 6.

(Reporting by Lindsay Dunsmuir; Editing by Andrea Ricci)

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