Federal Reserve officials said they were monitoring the U.S. stock market rout on Monday as they assess how renewed trade tensions between the United States and China may impact the economy and the course of monetary policy.
"I am certainly monitoring developments for their implications for the outlook and I will continue to be very attentive to them," Fed Governor Lael Brainard said at a forum at the Kansas City Fed.
Major U.S. stocks markets were down more than 3% in late afternoon trading.
While Fed officials says they avoid attaching too much importance to daily market changes, even large ones, sustained declines in stock prices can affect business and household spending plans, and influence how the U.S. central bank views the economy.
"I have said and others as well that we are committed to sustaining the expansion," with further interest rate reductions if necessary, said Brainard, who backed the Fed's decision to cut interest rates by a quarter of a percentage point last week.
Kansas City Fed President Esther George, by contrast, voted against that rate cut, but said on Monday she was also keeping an eye on the market's reaction to the latest intensification of the U.S.-China trade war.
"Markets move quickly. It takes some time to see how that evolves," George said at the forum. "The best you can do right now is just to monitor and see how that unfolds."
The day's events show the uncomfortable bind the Fed is in, caught between a U.S. economy that continues to perform relatively well, and Trump administration trade policies that have put financial markets on edge and raised economic risks.
The Fed cut rates last Wednesday as a precaution against some of those risks. The following day, Trump announced he would slap tariffs on another $300 billion in Chinese imports starting in September, and by Monday there were signs the Chinese planned to retaliate when the yuan was allowed to fall beyond the key 7-per-dollar level for the first time in more than a decade.
A cheaper yuan could boost China's exports and offset the impact of the tariffs Trump has already imposed and those he has threatened. It could also lead Trump to further pressure the Fed to respond with lower rates that, other things equal, would weaken the value of the dollar and make U.S. goods relatively cheaper overseas.
Traders in contracts tied to the Fed's policy rate are now expecting the central bank to cut rates at its remaining three policy meetings this year.
© 2022 Thomson/Reuters. All rights reserved.