Fed Governor Says Central Bank Could Take Advantage of Trade War Inflation

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A Federal Reserve governor, Lael Brainard, laid out a clear-cut case on Thursday for looking the other way if President Trump’s trade war with China pushes prices higher.

It is possible that Mr. Trump’s tariffs, which increased to 25 percent on $200 billion worth of Chinese goods last week and could extend to an additional $300 billion of imports, could lift prices in the United States. It might even boost the Federal Reserve’s preferred inflation gauge toward — or over — the central bank’s 2 percent goal. The price index currently stands at just 1.6 percent on a yearly basis after stripping out volatile food and fuel.

“The Federal Reserve could use that opportunity to communicate that a mild overshooting of inflation is consistent with our goals and to align policy with that statement,” Ms. Brainard said in a speech at the National Tax Association’s spring symposium in Washington. She avoided talking about tariffs directly, but talked about what might happen if import prices shot up.

Her comments are notable because some Fed watchers have speculated that the central bank could raise rates to offset a run-up in inflation spurred by the trade war. On Thursday, Walmart said higher tariffs would increase prices for consumers.

The Fed has been grappling with stubbornly low inflation for years, and has not achieved 2 percent price gains consistently since adopting that as its target in 2012. Officials often attribute the shortfall to one-off quirks in the data, though, and the Fed chairman, Jerome H. Powell, blamed the latest miss on fleeting factors. Ms. Brainard is arguing that something more permanent and problematic might be driving the weakness.

“Underlying trend inflation — the trend in inflation after filtering out idiosyncratic and transitory factors — appears to be somewhat below the Federal Reserve’s goal of 2 percent,” she said. “Achieving our inflation target on a sustainable basis is likely to require a firming in longer-run inflation expectations.”

While muted inflation means that the Fed no longer needs to lift interest rates as aggressively in response to very low unemployment, Ms. Brainard said, that poses financial stability risks. Investors might tiptoe into riskier propositions as they search for higher payoffs in a low-rate world.

“It is therefore wise to proceed cautiously, helping to sustain the expansion and further gains in employment and with appropriate regulatory safeguards that reduce the risk of dangerous financial imbalances,” she said.

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