Fed sees case for interest rate cuts

The U.S. Federal Reserve on Wednesday signalled it could cut interest rates by as much as half a percentage point over the remainder of this year in response to increased economic uncertainty and a drop in expected inflation.

The Fed, which held rates steady after the end of its latest two-day policy meeting, dropped a promise to be “patient” in adjusting rates and said it “will act as appropriate to sustain” a nearly 10-year economic expansion.

Nearly half of the U.S. central bank’s 17 policy-makers now show a willingness to lower borrowing costs over the next six months, and Fed chairman Jerome Powell said that even those who do not see a rate cut as the likeliest outcome “agree the case for additional accommodation had strengthened” since the last policy meeting in May.

Though the baseline outlook remains “favourable,” Powell said, risks continue to rise, including the drag that rising trade tensions may have on U.S. business investment and signs that economic growth is slowing overseas.

“Ultimately the question we are going to be asking ourselves is, ‘are these risks going to be continuing to weigh on the outlook?’ ” Powell said in a news conference after the release of the Fed’s policy statement and fresh economic projections. “We will act as needed, including promptly if that’s appropriate, and use our tools to sustain the expansion.”

He said if the Fed does ease monetary policy by cutting interest rates, it may also halt a gradual slimming of its massive balance sheet.

Interest-rate futures surged in response to the dovish remarks, and traders are now betting heavily on three rate hikes by the end of the year. U.S. stocks turned higher, with the benchmark S&P 500 up about 0.4 per cent from the previous day’s close.

In the Treasury market, expectations that the Fed would be cutting rates before long drove the yield on two-year notes, often a proxy for Fed policy, to the lowest in a yearand-a-half at around 1.75 per cent.

The gap between those and the yields on 10-year notes widened by the most in 16 months.

Policy-makers “expressed concerns” about the pace of inflation’s return to two per cent, Powell said.