The Federal Reserve has expressed concerns about the US job market weakening substantially due to President Donald Trump’s erratic trade war policies. According to the central bank’s latest policy minutes, economists have revised up their projections for inflation this year and lowered their expectations for economic growth. “The labor market was expected to weaken substantially,” the minutes stated, highlighting the uncertainty surrounding the outlook for the labor market and its dependence on the evolution of trade policy.
Fed policymakers are worried that the labor market’s resilience may not persist, especially if Trump continues with his on-again, off-again tariff regime. Some officials noted that their contacts and business survey respondents have reported limiting or pausing hiring due to elevated uncertainty. Despite this, the US labor market currently shows robust signs, with unemployment standing at 4.2% and employers adding 177,000 jobs last month.
Economic Impact of Trump’s Trade War
The US economy’s future now largely hinges on Trump’s ever-evolving trade war. While tensions have eased since early April, some countries have signaled willingness to negotiate and potentially strike a full trade deal with the US. Notably:
- The UK announced an agreement with the US on May 8, outlining a framework for a potential trade deal.
- China and the US jointly announced a 90-day rollback of tariffs on each other’s goods on May 12.
- The European Union has expressed willingness to fast-track trade negotiations with the US, prompting Trump to back down from imposing a 50% tariff on EU imports.
However, challenges remain, particularly with China, which has disputed the US stance on AI chips made by Huawei and refused to take responsibility for stemming the flow of fentanyl into the US.
Labor Market’s Role in the Economy
The health of the labor market is crucial, as it fuels the economy with consumer spending, accounting for about 70% of the US economy. If layoffs rise, Americans would be forced to reduce spending, triggering a downward spiral leading to weaker economic growth and more layoffs. The air is still rife with uncertainty, reflected in the University of Michigan’s consumer sentiment survey, which dropped to its second-lowest reading since 1952.