San Francisco Fed Chief Sees Big Risk of Trade Tariffs

  • Why it matters

    Why it matters

    John Williams, who next year will get to vote on Fed interest rate decisions, fears that talk of trade barriers could throw a wrench into the Fed’s own policy making.

  • Facts


    • After seven years at record lows, the Federal Reserve has raised interest rates three times since December 2015, the last increase last month, and is expected to raise interest rates another three times by the end of this year.
    • The Fed’s balance sheet currently totals more than $4 trillion after the central bank engaged in three rounds of bond buying or “quantitative easing” in the aftermath of the 2008 financial crisis.
    • Fed officials have suggested the central bank could start reducing its balance sheet at the end of this year. The European Central Bank, by contrast, expects to only begin tapering its own QE program some time in 2018.
  • Audio


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79985764 San Francisco Fed Williams Bernd Roselieb HB
John Williams of the San Francisco Federal Reserve is worried about the future of trade. Picture Source: Bernd Roselieb for Handelsblatt

John Williams isn’t mincing words when it comes to trade. It’s not just that the president of the San Francisco Federal Reserve believes trade barriers are bad for growth, he believes they are a serious risk for the US and global economy today.

“One of the bigger risks to the US and global economy is that countries on a multilateral basis would significantly raise impediments to trade, whether tariffs or other things,” he said in an exclusive interview with Handelsblatt.

The reason is simple. For Mr. Williams, who sits on the West Coast of the United States, his country lies at the heart of a huge global supply chain that runs not just north-south but extends westward across the Pacific. Asked whether he expected US President Donald Trump to follow through on threats to confront countries like China or Germany that are running current-account surpluses, Mr. Williams warned that raising tariffs would be “bad for growth, bad for jobs and bad for inflation” in the United States and elsewhere.

“I would hate to see that happen. Supply chains are integrated across the globe and throughout the US economy. That may be underappreciated by some people – just how integrated our supply chains are, so deeply built into how our economy works. Things just go around and around, especially when you think of the US relationship with Mexico and Canada and Asia,” he said. “Hopefully that won’t happen – there may be some separating of campaign rhetoric from what actually happens – but I do think that is one of the risks,” he added.

If it does happen, that could have an impact on the US central bank, which is in the middle of normalizing its policy after nearly a decade of record low interest rates. Outside of the global trade battles, Mr. Williams, who in 2018 will be a voting member of the Fed’s rate-setting Federal Open Market Committee, says there are “some potential upsides to the economic outlook” that if anything could encourage the Fed to raise interest rates faster rather than slower.

While the Fed is in the middle of normalizing its interest-rate policy and is likely to start cutting its $4-trillion strong balance sheet towards the end of this year, the European Central Bank hasn’t even begun the process of reducing its own monthly bond purchases that are designed to stabilize the euro zone economy. Mr. Williams remembers the initial discussions about the Fed’s own “tapering” well. He seems to regret some of the process, which included a communication snafu by former Fed chair Ben Bernanke, who spooked markets with his first mention of tapering in what became known as the “taper tantrum” of September 2013. Rather than make the same mistake when it actually began tapering months later, the Fed chose to spell out exactly how it would taper when the time came: “We lost that optionality to adjust it, but it did reduce the [market] uncertainty.”

The lesson for the ECB? Be clear from the outset about what you’re going to do, and how you’re going to go about it.

Read a full transcript of our interview with San Francisco Fed President John Williams below.

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