August 16, 2019 12:15 PM, EDT

Fed Survey Finds Tariffs Pushing Up Prices, Pinching Profits

The Marriner S. Eccles Federal Reserve buildingThe Marriner S. Eccles Federal Reserve building in Washington by Andrew Harrer/Bloomberg

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A new survey by the Federal Reserve Bank of New York found a growing conviction among businesses that President Donald Trump’s tariffs were hitting their bottom line.

That’s the sort of concern that officials worry will sap U.S. economic growth and helps explain why they reduced interest rates last month for the first time since 2008. Fear that an escalating trade war will trigger a recession has roiled financial markets and increased bets the Fed will cut again when it meets next month.

Supplemental questions posed in the August editions of the New York Fed’s Empire State Manufacturing Survey and Business Leaders Survey showed a clear increase in the number of respondents who reported tariffs raising input costs, compared to their answers in August 2018. About two-thirds of manufacturers saw an upward effect on prices paid and some 45% saw an upward effect on selling prices. The numbers were slightly lower but similar in the services sector.

In assessing the overall effect on their bottom lines, “among manufacturers, 51% perceive a negative effect in 2019, and 47% anticipate a negative effect in 2020,” the Fed said. “For service firms, the proportions are just under 40% for both years.”

Fed Chairman Jerome Powell cited trade policy uncertainty when officials cuts rates July 31. The central bank’s Beige Book of anecdotal reports compiled by its 12 regional branches has repeatedly highlighted that business confidence was being dented by trade policy uncertainty, potentially delaying investment.

The New York Fed survey findings also chime with a report Aug. 16 from Deere & Co. that it is seeking cost savings amid a 24% fall in operating profit from its agriculture machinery unit, which was hit with higher production costs and lower shipping volumes. That makes sense, given U.S. farmers complain that they’ve been big losers in the trade war.

The Trump administration began introducing modest tariffs in early 2018 and things have steadily escalated, with the net widening to include imports from a number of countries — some of which have since been exempted — with China as the main focus. The president’s latest maneuver was to impose tariffs on $110 billion of new imports from China starting Sept. 1, with duties on a further $160 billion to go into effect Dec. 15.