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Why Trump's trade war remains ‘one of the elephants in the room’ for the economy

The Trump administration and China are reportedly moving to delay a new round of tariffs on $160 billion in Chinese imports set to take effect Dec. 15. But trade remains one of the great unknowns for the Fed and for Wall Street, and at least one strategist argues the markets aren’t pricing in the risks.

President Trump’s trade war “is one of the elephants in the room for the Fed,” Kristina Hooper, Invesco’s chief global market strategist, told Yahoo Finance’s The First Trade

“I don't think it's priced in, and I think the market has been very optimistic with regard to trade, really, since the get-go,” Hooper said. If the tariffs take effect, she predicts you could see a “relatively brief” market sell-off to the tune of 5%.

The bigger issue, she said, is the impact on the average American consumer who’s been helping drive the economy this year. This latest round of tariffs would hit everything from cell phones and video game consoles, to fireworks, toys and some clothing.

In this Tuesday, Nov. 5, 2019, photo workers trim windows for the upcoming holiday season at the Macy's flagship store in New York. (AP Photo/Richard Drew)

“It really remains to be seen exactly how consumers react if we do get those Dec. 15 tariffs,” Hooper said. “I think there's a time lapse, where we actually see consumers slowly adjust to higher prices, perhaps forego some spending. We certainly saw that with washing machines.”

“There are some expenses they will tolerate. And maybe that means a lower savings rate,” Hooper said.

The tariffs could push the Fed to take action in January if there’s an impact on the overall economy, she said: “The Fed might stand ready to be a little more accommodative at its next meeting.”

“The Fed increasingly sees its role as not just about essentially bringing about full employment while controlling prices. It's also about creating stability in markets. And that's what this is,” she said. “I think that going forward, we're likely to see the Fed do more in the way of that role.”

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