Washington: Continued trade tensions and Brexit are key risks facing the US economy and could undermine financial stability, the Federal Reserve cautioned on Friday.
"Potential downside risks to international financial stability include a downturn in global growth, political and policy uncertainty, an intensification of trade tensions and broadening stress in emerging market economies," the Fed said in its semi-annual report on monetary policy.
Those concerns caused the Fed to shift to wait-and-see mode after raising interest rates four times in 2018, after "volatility in financial markets and increased concerns about global growth made the appropriate extent and timing of future rate increases more uncertain than earlier."
And the prospects that Britain will leave the European Union without an agreement could create "a wide range of economic and financial activities could be disrupted," despite preparations.
"Without such a withdrawal agreement, there will be no transition period for important trade and financial interactions between UK and EU residents." The report was prepared for Congress to accompany the twice-yearly testimony by Fed Chairman Jerome Powell, who will appear on Tuesday and Wednesday to answer questions about monetary policy.
Powell and other central bankers late last year pivoted sharply away from expectations that more increases in the lynchpin for borrowing costs would be needed this year. Instead, they clearly and repeatedly signaled they will pause for now.
The report cited tariffs as a key risk to rising inflation but falling oil prices and a strong dollar could dampen inflation. In fact the trade tensions with China -- which are subject to high-stakes negotiations this week -- are mentioned more than 20 times in the nearly 60-page report.
The report repeated that the Fed continued to expect the US economy to put in a solid performance this year, with inflation approaching the two per cent target.
