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Fed's Bostic Says Trade Wars Aren't Easy and Winnable -- Update

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03/07/2018 | 05:41pm CEST

By Michael S. Derby

FORT LAUDERDALE, Fla. -- Federal Reserve Bank of Atlanta President Raphael Bostic warned Wednesday that erecting trade barriers is unlikely to help the U.S. economy, while noting the threat of these restrictions is adding uncertainty to the central bank's interest-rate-rise outlook.

Asked if a trade war with other nations would be easy and winnable, as President Donald Trump has said, Mr. Bostic answered, "No."

Protectionism "is often not helpful for the broader economy," and while trade barriers might lift an individual sector, they will cause more problems than the policy solves, Mr. Bostic said at an event in Fort Lauderdale. Also, "it introduces a lot of uncertainty in how the economy will perform," he said. The policy maker said financial markets are likely to reflect that uncertainty, although he didn't say how.

Other Fed leaders, like William Dudley of the New York Fed, in recent days have cautioned against putting up new trade barriers. Mr. Trump is moving to place tariffs on steel and aluminum imports that many economists say are a bad idea, and other nations are already weighing retaliatory actions.

Mr. Bostic is a voting member of the interest-rate-setting Federal Open Market Committee.

He spoke as expectations are rising that the Fed might pursue a more aggressive path of interest-rate increases this year. The most recent central bank forecasts call for about three rate raises in 2018, but a move toward more stimulative government tax and spending policies when the economy is already performing well may drive the central bank to increase rates more.

Speaking with reporters after his speech, Mr. Bostic said that he had been expecting three rate increases this year in the wake of the change in government spending and taxation policies. But the president's trade threats are clouding the outlook and adding a negative risk.

"It's really hard to know how things will evolve" in the current climate, Mr. Bostic said.

"Some of the developments with trade policy have introduced some uncertainty on how the economy is going to perform," he said. Because of that, "I'm really taking a wait-and-see attitude about how robustly the economy responds to the stimulus, before I make a decision whether we want to revise our expectations upward or downward," Mr. Bostic said.

But he also said "everything's on the table" for monetary policy, and what happens will be driven by how the economy performs. Mr. Bostic added that he makes his decisions on rates at each meeting, and he doesn't form his view on an annual basis.

Mr. Bostic also told reporters the exit of Gary Cohn, President Trump's top economic adviser, will have an "impact" in part because his was a voice that Wall Street found "comfort" in hearing.

Speaking before the gathering, Mr. Bostic noted that most of the run up in the stock market that happened after the 2016 election was psychological in nature and not driven by fundamental factors like the economy's performance. He also said President Trump was good at managing the psychology of his supporters.

In a speech Tuesday night in New York, Fed Governor Lael Brainard said the current state of the economy "is the mirror image of the environment we confronted a couple of years ago." She said that "in the earlier period, strong headwinds sapped the momentum of the recovery and weighed down the path of policy. Today, with headwinds shifting to tailwinds, the reverse could be true."

While inflation remains low, officials are increasingly confident that a strong job market and the boost from the shift in fiscal policy will push inflation back up to the Fed's 2% target, and that is boosting officials' confidence that they can raise rates.

Write to Michael S. Derby at michael.derby@wsj.com

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