Could US-China trade war force Fed hike?

US - Chins trade warTensions between the US and China continue to play out in the form of a trade war with little sign of a resolution, raising the prospect of higher inflation and, therefore, a rate hike from the US Federal Reserve (Fed). The tit-for-tat trade war saw China announce retaliatory tariffs on $60 billion of US goods from June 1, 2019. The move came just days after the US hiked tariffs on $200 billion of Chinese goods from 10% to 25%. US President Donald Trump is expected to meet with his Chinese counterpart, Xi Jinping, at the G20 summit in Japan in June, which is likely to be the next juncture of clarity for investors, according to JP Morgan Asset Management (JPMAM). “Tariffs appear to be a fixture of US trade policy going forward and are unlikely to be completely removed any time soon,” said Ian Hui, global market strategist at JPMAM. “Higher consumer prices from rising tariffs have raised worries about higher inflation and a policy response from the Fed.” While the tariffs applied so far largely avoid customer-related goods, they would see a spike in prices if the proposal to place tariffs on all imports from China is imposed. “The concern here would then be that inflationary pressures could rise and in the worst-case scenario, forcing a reaction from the Fed,” said Hui. He concluded: “The trade conflict continues to add uncertainty to the global outlook and growth prospects, but our view is that an eventual trade deal will still be reached, as a total breakdown in talks will see both China and the US suffer. The path to any resolution is still uncertain and with such volatility, we still advocate for a balanced approach between equities and fixed income.” ©2019 funds global asia

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