MNI INTERVIEW:Richmond Fed's Athreya-1: Trade Is Downside Risk

By Sara Haire

     WASHINGTON (MNI) - The U.S. economy appears to be strengthening, but

Richmond Fed Executive Vice President and Director of Research Kartik Athreya

views the balance of risks for the near and long-term outlook to the downside

mainly due to the uncertainty surrounding U.S. trade policies, Athreya said in

an exclusive interview with MNI.

     Athreya explained that while "it is genuinely striking how strong growth

is," he would be "much more optimistic if the uncertainty [over trade] could be

put to bed."

     The Federal Open Market Committee itself has generally been emphasizing

that risks remain balanced, choosing to generally avoid direct comments about

the trade impact.

     Recently, inflation has neared the Fed's 2% symmetric objective, the

unemployment rate is now at a decades low level of 3.8%, and the economy is

expected to continue to grow above-trend.

     Policymakers have said they expect the fiscal stimulus package to boost

growth in the latter half of this year and into next year. Athreya pointed out

that some "tracking estimates for Q2 are looking as high as 5%," which if

estimates are accurate, would make it the highest quarterly growth since 2014.

     However, Athreya noted that while these estimates are "remarkable," the

balance of risks is tilted to the downside due to the precarious nature of the

trade policies, potentially turning into a trade war. And, he added, he "kind of

hopes we don't go down that path," but it still remains something "that everyone

has to pay attention to."

--FED OUTLOOK 'ROUGHLY BALANCED'

     At the ECB's panel of Central Bank heads, Federal Reserve Chairman Jay

Powell noted that there have been more concerns reported from businesses, but

repeated that it has not yet shown up in the data and the balance of risks still

appear to be "roughly balanced." However, he noted that if "principal changes"

were made to trade policy, this could cause the Fed to modify their outlook.

     Policymakers have been careful to avoid discussing trade, with most in the

last few weeks maintaining that the balance of risks still appears to be

balanced, but businesses have been expressing more concerns within their

districts with only few businesses reporting negative effects from the already

imposed steel and aluminum tariffs.

     The first semblances of effects on businesses is beginning to take shape as

Harley Davidson, a large U.S. motorcycle company has announced their intention

to move some production out of the U.S. due to the retaliatory tariffs from

other countries on U.S. goods.

     While it is still possible that a trade war could still be avoided, the

possibility of its occurrence appears to be increasing as President Trump

doubled down on his threat in his recent tweet on Sunday where he called for

trading partners to remove barriers and tariffs, and if they do not, they will

be met with "more than reciprocity."

--MIXED LONG-TERM OUTLOOK

     As the economy is expected to benefit from the recent tax cuts and fiscal

stimulus package and there will likely be "good economic outcomes" in the

short-term, but also "longer-term effects as they've changed the incentives to

invest."

     However, he noted that longer-term outcomes could also be negatively

affected if there was a sustained trade war. He also explained that barring

reform, the longer-run trajectory for public finance largely implies large

deficits.

     Athreya said that "all else equal, models show upward pressure on interest

rates more generally," and having hefty public debt is a "headwind that we'll

end up facing."

     Some policymakers have echoed this sentiment about the fiscal stimulus

having positive short-term effects, but negative longer-run effects, which will

play into policy decisions going forward.

     Meanwhile, most policymakers have refrained from diving too deep into

potential effects from a trade war as disputes continue to develop. They instead

have stated their willingness to use incoming data to inform the correct path of

monetary policy.

     Athreya supported this notion of watching incoming data, as this period is

"unusual in terms of having other forces at work." He also reiterated that this

supports the "argument for being gradual" with removing accommodation.

--MNI Washington Bureau; +1 212-800-8517; email: sara.haire@marketnews.com