Fed may cut rates as soon as July
Central bank wary of trade war ‘uncertainties’
WASHINGTON – The Federal Reserve held interest rates steady Wednesday but signaled it’s prepared to cut them as soon as next month if the U.S. and China don’t reach a détente in their escalating trade war and other risks continue to grow.
Policymakers also unexpectedly forecast lower rates by next year.
And while the Fed’s median estimate isn’t for a rate cut this year, nearly half of Fed policymakers expect at least one. Eight of the 17 voting Fed policymakers predict as much as a half-percentage-point decline in rates in 2019.
In a statement after a two-day meeting, the Fed highlighted the “uncertainty” of its outlook.
“In light of these uncertainties and muted inflation pressures, the (Fed’s policymaking committee) will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion, with a strong labor market” and inflation near the Fed’s 2% goal.
The (Fed’s policymaking committee) ... will act as appropriate to sustain the expansion, with a strong labor market.”
That move was expected and echoes Fed Chairman Jerome Powell’s vow to support the 10-year-old expansion if the U.S. trade war with China deepens and poses a “downside risk” to its outlook. The Fed also removed its previous vow to be “patient” as it weighs whether to lift or lower rates based on the course the economy takes.
Stocks rose after the Fed announcement, with the Dow Jones industrial average closing up 38 points, or 0.2%, to 26,504 on Wednesday.
For now, the Fed kept its key shortterm rate at a range of 2.25% to 2.5% and modestly lowered its economic outlook. A rate cut would mean lower costs for borrowers that have endured higher expenses the past few years but also lower returns for savers who have started to benefit from higher yields.
The trade standoff is the chief reason for the uncertainty, but Powell also cited a sluggish global economy, weak
business investment, inflation persistently below the Fed’s 2% target and a disappointing 75,000 job gains in May.
“We’re monitoring the impact of all these developments,” Powell said at a news conference. Citing solid consumer spending, he added, “So far this year, the economy has performed relatively well” and “the baseline outlook is a good one.”
But he added, “In the weeks since our last meeting, the crosscurrents have reemerged. Apparent progress in trade turned into a greater uncertainty. The question is whether these uncertainties will continue to weigh on the outlook.”
President Donald Trump has announced plans for a 25% tariff on the remaining $300 billion in Chinese imports not already hit with a duty. The strategy would increase prices for everyday consumer products such as electronics, toys and clothing and ripple through the economy, possibly tipping the nation into recession.
The trade fight has put the Fed in a thorny position because the economy otherwise is slowing but healthy. And Trump is scheduled to meet with Chinese President Xi Jinping at the G-20 summit in Japan this month.
Analysts view a rate decrease as an unusual “insurance cut” because it would be designed to prevent a potential downturn in the economy that’s not yet evident.
Fed officials may be inclined to act early because the Fed’s key interest rate is still relatively low. Yet the prospect of a rate cut marks an about-face for a Fed that was lifting rates last year.
What will happen to rates?
The Fed maintained its forecast for stable rates this year, but policymakers are split, with seven projecting a half-percentage-point reduction. Fed officials are also predicting a rate cut in 2020, based on their median estimate.
Economy
Fed officials kept their forecast for 2.1% growth in 2019 and raised their estimate to a 2% gain next year.
The economy generally has been strong, growing at about a 3% pace both last year and in the first quarter. Growth is expected to cool in the second
“Apparent progress in trade turned into a greater uncertainty. The question is whether these uncertainties will continue to weigh on the outlook.”
Jerome Powell, Federal Reserve chairman
half of the year as the effects of federal tax cuts and spending increases fade. But an intensifying trade war likely would spell weaker advances.
Jobs
With unemployment at a 50year low of 3.6%, the Fed lowered its forecast for the jobless rate at the end of this year to 3.6% from 3.7%. It expects the rate to edge up to 3.7% by the end of 2020.
Inflation
The Fed acknowledged inflation has remained low, giving it room to lower rates. The Fed said it expects its preferred measure of annual inflation to stay at 1.5% by year-end before rising to 1.9% in 2020.
It also lowered its estimate of a core reading that strips out food and energy items to 1.8% this year and 1.9% in 2020.
Inflation has remained surprisingly subdued despite a pickup in pay increases that were expected to be passed along to shoppers.
Powell has cited temporary factors, such as changes in the way clothing prices are measured. Many economists, however, point to longer-term trends, such as discounted online shopping.