The confusion within the Fed is explicable. The Trump administration’s trade policies have raised question marks over the direction of an economy that, before the trade war with China, had been growing solidly. The growing impact of the trade conflict on US business investment and manufacturing activity – it is depressing both – along with the wider role the disruption to global trade and investment is having on global growth is the source of the Fed’s uncertainty. Fed chairman Jerome Powell made it clear that the US central bank is taking it one meeting at a time, prepared to either aggressively reduce rates towards zero and even resume quantitative easing – buying bonds and mortgages to lower market interest rates – or to hold them where they now lie or raise them if US growth picks up. In other words, the Fed doesn’t really have a clue about even the near-term direction of the US economy. The median forecast of no change of rates in 2020 reflects that heavily clouded outlook.

Given how unpredictable the Trump administration has been on trade, and other issues, the Fed could be forgiven for its lack of certainty. Not that Donald Trump was in a forgiving mood. "Jay Powell and the Federal Reserve Fail Again. No 'guts', no sense, no vision! A terrible communicator!" he tweeted. Federal Reserve Board chairman Jerome Powell. His Open Market Committee is divided and uncertain about the US outlook. Credit:Bloomberg Trump wants the Fed to slash US rates and restart quantitative easing to stimulate the US economy and lower the value of the US dollar, even though the US economy is growing reasonably strongly, with unemployment of only 3.7 per cent.

The Fed’s indecision is understandable because the trade issues that forced it into reducing rates for the first time in a decade earlier this year are nearing an inflexion point. Earlier this month Trump delayed the imposition of tariffs on the final $US250 billion ($367 billion) of China’s exports to the US not already subjected to tariffs for two weeks as a "goodwill" gesture, because the original October 1 timeline coincided with the 70th anniversary of the founding of the People’s Republic. If the Fed appears indecisive and its members divided and somewhat confused, it’s not their fault, it’s Trump’s. That unusually thoughtful gesture coincided with Trump musing publicly about the potential for an "interim" deal with China. Amid signs that the tariffs are directly impacting US companies and consumers and damaging business investment and manufacturing activity, it appears the administration is finally starting to appreciate that trade wars aren’t zero-sum games.

China’s economy might be more damaged but the US is also being materially harmed. US business is now aggressively lobbying the White House and Congress to end the trade war or at least halt its escalation. Loading Replay Replay video Play video Play video With an eye to next year’s US elections, the self-declared "Tariff Man" might also be starting to appreciate the impact the conflict may have on his re-election prospects as the odds on a US recession that coincides with the election are, according to financial market indicators, shortening. Those mutterings about an "interim" deal point to a potential escape route for Trump as the next round of discussions between the US and Chinese negotiators looms. Essentially, the US would not go ahead with the final tranches of tariffs, reverting to the $US250 billion level of earlier this year, and perhaps even lowering the rate. In exchange China would resume buying US agricultural products and other goods on a large scale and commit to protections for US intellectual property.

More contentious issues – deal-stoppers such as China’s support for state-owned enterprises – would be parked for some later date, perhaps indefinitely. Loading China would certainly agree to an "interim" deal of that nature – it’s always been prepared to make concessions that don’t impinge on its sovereignty or its state-directed economic model – and Trump would be able to claim a triumphant victory while limiting the damage to the US. The Fed would be acutely aware that it is the US-initiated trade conflict that is damaging the US and global economies and which, if it does escalate and really bite into US growth, would force its hand and push it back into unconventional policy territory. It would also be conscious that Trump is wildly unpredictable and could just as easily back down, as long as he can spin the outcome as a big win. If the trade war ended, or at least a proper truce were declared, the threat to US growth would be diminished.