The Federal Reserve left its benchmark rate unchanged on Wednesday at the end of its two-day meeting in Washington, D.C., and dropped the word “patient” from its statement, signaling a rate cut may be coming as soon as next month. In the statement, officials downgraded their assessment of economic activity to a “moderate” rate from the “solid” pace cited at their last gathering.
While the labor market is expected to remain robust and inflation will likely stay within bounds, “uncertainties about this outlook have increased,’’ the Fed said in the statement. “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
Fannie Mae downgraded its forecast for U.S. economic growth on Monday, citing a “ratcheting up of trade tensions,” and said 2020 will see the worst economy since the Great Recession. The mortgage giant revised its projection for GDP growth to 1.5% for next year, which would be the worst performance since a 2.5% contraction in 2009, according to data from the Bureau of Economic Analysis.
“The ratcheting up of international trade tensions, including tariffs applied by the U.S. and China, as well as the threat to impose tariffs on Mexico, could lead to higher prices and a possible reduction in consumer and business confidence,” according to the forecast released Monday. “This same uncertainty could also impact the previously invulnerable job market.”
Last month, President Donald Trump hiked tariffs to 25% from 10% on $200 billion worth of Chinese goods. In retaliation, China raised tariffs to 25% on $60 billion worth of U.S. products starting June 1. President Trump, after threatening to expand tariffs to a further $300 billion of Chinese imports, is meeting with Chinese President Xi Jinping next week at the G-20 in Japan.
Tariffs, also known as duties or levies, are collected by U.S. Customs and Border Patrol agents as goods enter the country. While President Trump often says China is paying the tariffs, it’s the American importers who have to fork over the cash. Typically, they pass all or some of the added cost to their distributors who eventually pass it on to the consumer at the end of the line.
The existing tariffs will cost the average U.S. household $831 a year through higher prices and reduced economic efficiency, according to a paper published by the Federal Reserve Bank of New York last month. In addition, the U.S. economy will suffer as companies buy more from suppliers outside China at higher prices, the paper said.