The Trump administration is pulling the economy in 2 directions and creating problems for the Fed

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  • Federal Reserve officials, who were just revising up their forecasts for economic growth, are now faced with the prospect of an escalating trade war.
  • Policymakers are taking a wait-and-see approach to assessing the economic effects of President Donald Trump’s signaled protectionism, but many are warning against the dangers of retrenchment.
  • “The best approach is to deal directly with the people who are affected rather than falling back on tariffs,” said Jerome Powell, the Fed chairman.
  • Asked about the tariff plans, the president of the Dallas Fed told CNBC that “any actions we could take as a country to jeopardize those relationships are not in our interest.”

The rising prospect of a global trade war has thrown a wrench into the Federal Reserve’s hopes of at least three interest-rate increases this year.

Stocks took a deep hit Wednesday following the resignation of Gary Cohn as the head of the National Economic Council. Cohn, a former Goldman Sachs banker, had championed the new GOP tax law but opposed President Donald Trump’s proposed tariffs on steel and aluminum.

The prospect of trade frictions — which appears to be rising amid threats of retaliation from partners including Canada and the European Union — muddies an already complicated outlook for Fed officials.

Policymakers must now balance recent optimism about growth following the passage of the new tax law, which some see as a possible stimulus against the chances of a trade war despite increasingly belligerent rhetoric between the US and its major trading partners.

That give-and-take will be crucial to figuring out whether recent signs of economic strength can be sustained or, like other bursts of growth in the recent past, will prove fleeting.

‘Not the best approach’

Fed officials, who normally shy away from issues not directly related to interest policy or bank regulation, have been quick to condemn any push toward protectionism.

Trump’s pick for the Fed chairman, Jerome Powell, said during his first congressional hearing last week that “the tariff approach is not the best approach.”

“The best approach is to deal directly with the people who are affected rather than falling back on tariffs,” he said, adding that trade is a “net positive” for the US economy.

Asked on CNBC about Trump’s tariff plans, the president of the Dallas Fed, Robert Kaplan, said, “Any actions we could take as a country to jeopardize those relationships are not in our interest.”

He refrained from making any judgments on the economic effect of policies that are not fully fleshed out.

“It’s still too soon to say what policies are going to be implemented — my job is not to analyze or overly comment on hypotheticals,” he said.

It was Lael Brainard, one of the Fed’s most vocal advocates of low interest rates, who had the most positive economic view among recent Fed speakers during remarks to a group of bond dealers on Monday night.

“Mounting tailwinds at a time of full employment and above-trend growth tip the balance of considerations in my view,” Brainard told the Money Marketeers at a dinner. “With greater confidence in achieving the inflation target, continued gradual increases in the federal funds rate are likely to be appropriate.”

Brainard did not mention trade in her speech.

But if trade wars and monetary policy have anything in common, it is that they can have a deep economic impact but are likely to do so with long and variable lags. Policymakers will now have to keep an eye on both.

SEE ALSO: The biggest threat to the US from steel tariffs goes deeper than trade — and debt investors could be in for a surprise

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