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Second rate cut needed if trade war lasts

Second rate cut needed if trade war lasts


Second rate cut needed if trade war lasts

An additional interest rate cut may be necessary if the ongoing trade war between the U.S. and China persists, former top Federal Reserve official Donald Kohn told CNBC on Thursday.

The rate cut would act as a sort-of “cushion” for the U.S. economy as the trade dispute weighs on business and consumer confidence, the former vice chairman of the Federal Reserve Board said in a interview with “Closing Bell. “

U.S. stocks closed sharply lower Thursday after President Donald Trump said the U.S. would impose 10% tariff on another $300 billion worth of Chinese goods, effective Sept. 1. Trump’s announcement, made via Twitter, ratcheted up a trade fight that has carried on for more than year and a half.

A day before, the Fed, as expected, cut rates for the first time in more than a decade. Fed Chairman Jerome Powell later suggested that trade tensions influenced the decision on rates.

Kohn, who was vice chairman between 2006 and 2010, agreed with the Fed’s decision to cut rates. Kohn said Thursday that as a central bank official, he believed part of his responsibility was to provide the U.S. economy “some cushion and offsets” to “shocks that came from other places.”

“In a situation like this, it seemed to me there was very little cost to lowering interest rates,” said Kohn, who is now a senior fellow at the Brookings Institution.

As of Thursday evening, the market sees an 81% probability that there will be a rate cut at the Fed’s September meeting, according to the CME FedWatch tool.

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