Trade war could put Fed in tough spot, investment CEOs say

Tariff disputes are expected to be inflationary

Trade war could put Fed in tough spot, investment CEOs say

The Federal Reserve may face its biggest challenge in case the brewing trade dispute between the US and its economic partners worsens, according to two investment CEOs.

State Street Global Advisors CEO Cyrus Taraporevala and J.P. Morgan Asset Management CEO Mary Erdoes said the effects of a trade war may pose a problem for Fed officials who are seeking to normalize historically low interest rates, according to a CNBC report. The executives spoke at the Delivering Alpha Conference in New York.

The two leaders noted that not only do trade disputes hold back economic growth but they also tend to push prices higher throughout the global economy.

“I think that’s the big conundrum and I think that’s what Chairman Powell has basically signaled,” Taraporevala said. “The single biggest risk he sees is, in fact, if it does escalate into a trade war.”

Fed Chair Jerome Powell said recently that continued rate increases are justified as the economy is running at a fast enough pace.

Erdoes said that the trade disputes will certainly be inflationary.

"When you think of tariffs on China, you have to think through: If you put tariffs on the computer industry in China, you’re only hurting — 15% of the companies there are Chinese. Eighty-five percent of them are US and other multinationals that are going to be hurt,” Erdoes said.

"So what does that do? What does it do to the rest of Asia? What does it do to US companies that don’t have pricing pressure? Could they raise their prices? Now you have other inflation and so you cascade into these second or third derivatives, which is the hardest thing for people to think through,” she added.