The renewed escalation of trade tensions between the United States and China poses new downside risks to the economic outlook.
Fed member Stephen Millan said the situation makes it even more important for the Fed to lower interest rates, calling for rates to be quickly brought down to “neutral” levels.
“You don’t need to discount more than 50 basis points at a time.”
“The downside risks are higher now than they were before China imposed new restrictions on rare earth exports. As policymakers, we have an obligation to reflect this in monetary policy. It is now even more urgent that we quickly reach a more neutral policy position,” Millan said in a speech at CNBC’s American Investment Forum event in Washington.
China has announced restrictions on exports of rare earth elements vital to high-tech manufacturing, putting new pressure on global trade. In response, US President Donald Trump threatened to raise tariffs on Chinese imports to 100%. The move raised the possibility of a renewed trade war. The trade war threatened to shake up global trade last spring, but has since receded.
U.S. Treasury Secretary Scott Bessent said at the same forum that discussions between the two countries continue.
Last month, the Fed cut its policy rate by 25 basis points to a range of 3.75% to 4.00%. The market expects another rate cut at the next meeting on October 28-29.
Recalling his previous call for a sharp 50 basis point (bp) cut, Milan reiterated his expectation that inflation would fall in the coming months. “I’m not really concerned about upward pressures on inflation in the near term,” he said. “This will allow us to cut rates more quickly.”
Milan also pointed out that there is no evidence in the data that tariffs have boosted inflation, rather that past trends suggest the opposite. However, he added that if the expected decline in inflation in the housing sector does not materialize, the economic outlook will need to be reassessed.
*This is not investment advice.
