Fed Monitoring Tariffs but Suggests Rate Increases Are on Track

Federal Reserve officials are poised to continue gradually raising interest rates but are monitoring for signs of widespread economic fallout from President Trump’s trade policies, according to minutes from the most recent Fed meeting released on Wednesday.

The Fed minutes suggest that officials are concerned that Mr. Trump’s tariffs could hurt the current economic recovery but are waiting to see evidence of any damage in the data. Fed officials are also increasingly worried that trouble is brewing in the residential construction market, based on a recent slowdown in home building.

For now, however, the Fed shows no signs of deviating from its current path to return interest rates to more historically normal levels, despite Mr. Trump’s recent calls for the central bank to stop raising interest rates.

Several officials hinted in the minutes that they are preparing to remove a hallmark phrase of the last decade, one that has indicated the Fed intends to provide support for the economy. Future Fed statements may no longer carry language reading “the stance of monetary policy remains accommodative” as rates continue to rise toward a more historically normal level and the Fed continues to wind down its post-crisis economic stimulus.

Federal Open Market Committee officials left rates unchanged after the meeting that ended Aug. 1 and laid the groundwork in their post-meeting statement to raise rates in September, the third time this year. Since mid-July, Mr. Trump has used interviews and Twitter to pressure the Fed and its chairman, Jerome H. Powell, to pause the pace of increases, which have left the Fed’s target interest rate between 1.75 percent and 2 percent.

Minutes from the meeting revealed no willingness among Fed officials to grant Mr. Trump’s request. Officials “indicated that information gathered since the Committee met in June had not significantly altered their outlook for the U.S. economy,” the minutes reported. “Many participants suggested that if incoming data continued to support their current economic outlook, it would likely soon be appropriate to take another step in removing policy accommodation.”

That’s Fed-speak for “raise interest rates again” — and the minutes note that investors are overwhelmingly convinced another rate increase is coming next month.

While the economic recovery is strong, the Fed minutes show that officials are cognizant of the disparity between slow growth in nominal wages and the strength of the labor market, but they remain largely convinced those gains are about to accelerate.

Officials were united in their concerns over the potential of Mr. Trump’s trade policies to crimp economic growth. Mr. Trump has imposed tariffs levied on steel and aluminum from countries including Japan, Mexico and Canada, and additional tariffs on other imported goods from China.

“All participants pointed to ongoing trade disagreements and proposed trade measures as an important source of uncertainty and risk,” the minutes reported. A prolonged trade dispute, officials said, would likely bring “adverse effects on business sentiment, investment spending and employment. Moreover, wide-ranging tariff increases would also reduce the purchasing power of U.S. households,” while disrupting supply chains and reducing productivity.

But while companies are complaining about tariffs affecting them, the officials noted that “most businesses concerned about trade disputes had not yet cut back their capital expenditures or hiring but might do so if trade tensions were not resolved soon.”

Other than trade, the Fed’s biggest worry about the economy wasn’t inflation but residential construction. Several officials noted that new home building has slowed, possibly reflecting “declining home affordability, higher mortgage rates, scarcity of available lots in certain cities and delays in building approvals.” Some of their business contacts, officials said, had also complained of labor shortages in the construction sector — and of tariff increases pushing up their cost of materials.

Officials also noted that mortgage purchases and home refinancing had also slowed. Some expressed worry over “the possibility of a significant weakening in the housing sector” — an apparent reference to the effects of higher rates on borrowing and construction. There was no sign in the minutes that Fed officials were worried home values were in a “bubble,” similar to the period before the financial crisis.

In other areas, Fed officials expressed more division.

Some officials theorized that the slow pace of wage growth — even before accounting for inflation, which has wiped out all wage gains for nonsupervisory workers over the last year — reflected slow productivity growth or lags in companies’ responses to a tight labor market, which typically pushes employers to raise salaries when competing for workers. Others said the pace of increases suggests there is still more room for unemployment to fall before it begins to push up wages more significantly. Some officials said they expected to see improvement “before long” in part because firms in their regions were beginning to report more willingness to raise pay.

There are also continuing differences over the banking system and whether to push for even larger capital cushions given the robust economy. The minutes report officials argued for and against strengthening capital requirements for banks now, “while their profits are strong and the economic outlook is favorable” in order to better stabilize the financial system against an economic shock.