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Repeats Story Initially Transmitted at 13:15 GMT Jun 26/09:15 EST Jun 26
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
[TOPICS: MAUDS$,M$U$$$]