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Economists: The Fed 'isn't enough' to offset damage of tariff skirmishes with China and Mexico

Key Points
  • Nathan Sheets, chief economist at asset manager PGIM Fixed Income, tells CNBC that the U.S. can only fully reduce the damage of its tariff skirmishes with China and Mexico by resolving those issues at the negotiating table.
  • "The Fed can mitigate some of the adverse effects, but I'm not sure the Fed is inclined to move fast enough or significantly enough to entirely offset the effects of this trade war," he said.
  • Robin Brooks, chief economist at the Institute of International Finance, echoed that a dovish Fed isn't enough to offset risks posed by tariffs and geopolitical tensions.
Federal Reserve Board Chairman Jerome Powell at a news conference in Washington, DC, Jan. 30, 2019.
Saul Loeb | AFP | Getty Images

A dovish Federal Reserve can use tools such as rate cuts to lessen the damage of America's tariff skirmishes with China and Mexico, but it is either limited in its effectiveness or in its motivations, two economists told CNBC on Thursday.

Instead, the U.S. has to resolve those issues at the negotiating table, Nathan Sheets, chief economist at asset manager PGIM Fixed Income, told CNBC at the IIF Spring Membership Meeting in Tokyo.

"The Fed can mitigate some of the adverse effects, but I'm not sure the Fed is inclined to move fast enough or significantly enough to entirely offset the effects of this trade war. I think ultimately the solution or resolution of this has to come at the negotiating table between President (Donald) Trump and President Xi (Jinping), and between the United States and Mexico, " he said.

"The Fed will do its best given where the economy is, but it would take a dramatic easing of monetary policy for them to fully offset these kinds of effects," Sheets added.

U.S. Federal Reserve Chairman Jerome Powell had on Tuesday signaled that the central bank was open to easing monetary policy to support the economy, amid increasing expectations for multiple Fed rate cuts this year.

He said the central bank is watching current economic developments and will do what it must to keep the near-record expansion going.

Also speaking to CNBC at the IIF Spring Membership Meeting, Robin Brooks, chief economist at the Institute of International Finance, added: "There are some warning signs ... we are worried about (emerging markets). All these geopolitical, tariffs, sanctions, trade risks are really damaging to emerging markets, and a dovish Fed isn't enough to offset those."

Markets have been spooked by trade tensions that spread to Mexico last week when Trump announced that the U.S. will impose tariffs on Mexican goods, with more duties to be added until the country takes action on immigration that's deemed sufficient by the White House.

Meanwhile, U.S. trade tensions with China continue to be unresolved, with rhetoric turning more negative in the past two weeks.

Meanwhile, the International Monetary Fund warned on Wednesday that U.S.-China tariffs — both implemented and proposed — could cut global economic output by 0.5% in 2020. It also lowered its 2019 growth forecast for China to 6.2% from 6.3%.

The IMF has been revising down its projections for global growth in recent quarters as trade tensions and concerns surrounding China have fueled plunges in stock markets and dented corporate earnings.

— CNBC's Matt Clinch contributed to this report.