Washington
CNN
—
Economists and top policymakers at the Federal Reserve see a growing risk of America’s job market weakening because of President Donald Trump’s erratic trade war, according to minutes from the central bank’s latest policy released Wednesday.
“The labor market was expected to weaken substantially,” the minutes said, adding that Fed economists at the May 6-7 meeting also revised up their projections for inflation this year and lowered their expectations for economic growth. Fed policymakers also fretted over whether the labor market’s resilience could persist, especially if Trump continues with his haphazard on-again, off-again tariff regime.
“Participants assessed that there was a risk that the labor market would weaken in coming months, that considerable uncertainty surrounded the outlook for the labor market, and that outcomes would depend importantly on the evolution of trade policy as well as other government policies,” the minutes said.
Earlier this month, Fed officials voted to hold borrowing costs steady for the third consecutive meeting, waiting for clarity on the direction of Trump’s policies and how the US economy will respond to his massive policy shifts.
The labor market’s resilience has also allowed Fed officials to stay on hold, since it means they don’t have to step in to provide the economy with some relief through a rate cut. But that could change if it turns out hiring is slowing sharply, or even declining.
Some Fed officials noted that “their contacts and business survey respondents reported limiting or pausing hiring because of elevated uncertainty.”
But so far, things don’t look too shabby for the US labor market. Last month, unemployment stood at a low 4.2% as employers added a robust 177,000 jobs. New applications for unemployment benefits also remain relatively low.
The US economy’s future now largely hinges on what happens with Trump’s ever-evolving trade war, but it seems like tensions have mostly eased since early April, when Trump unveiled a massive tariff hike on dozens of countries.
Trump delayed his so-called “reciprocal” tariffs until July 9, after they briefly went into effect. Since then, some countries have signaled they’re willing to negotiate and potentially strike a full trade deal with the United States. On May 8, the United Kingdom was the first trading partner to announce an agreement with the US, which wasn’t a fleshed-out trade deal, but rather a concept of a framework.
Then, on May 12, China and the US jointly announced that both countries will drastically roll back tariffs on each other’s goods for an initial 90-day period. And the European Union this week said it is willing to fast-track trade negotiations with the US, which prompted Trump to back down from his recent threat to impose a 50% tariff on imports from the EU.
But the clock is ticking on more than 100 trade deals that Trump has to get done by early July. And China still has a bone to pick over a few issues. Last week, China’s Commerce Ministry said the US is “undermining” the framework both countries laid out in Geneva earlier this month, after the Trump administration warned companies against using AI chips made by Chinese tech titan Huawei. Beijing has also said it doesn’t have any role to play in stemming the flow of fentanyl into the US, defying Trump’s demand that it does something to stop the scourge of the drug.
The health of the labor market is crucial because it is precisely how Americans are able to fuel the economy with their dollars. Consumer spending makes up about 70% of the US economy.
If layoffs start to rise, Americans would be forced to rein in their spending, triggering a downward spiral that would lead to weaker economic growth and even more layoffs.
The air is still rife with uncertainty for the Fed, businesses and consumers. The University of Michigan said in a preliminary survey that consumer sentiment this month dropped to its second-lowest reading on records going back to 1952, while the Conference Board said Americans felt more upbeat in May for the first time in months.
