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Fed Holds Rates Steady but Opens Door to a Cut The Fed May Give Trump His Rate Cut. The Question Is When.
(about 4 hours later)
WASHINGTON — Federal Reserve officials left interest rates unchanged at their June meeting but opened the door to a cut if President Trump’s trade fight intensified and risks to the American economy increased. WASHINGTON — President Trump might get what he wants from the Federal Reserve, which kept interest rates steady on Wednesday but indicated that it could soon cut them as economic risks mounted and inflation remained stuck below target.
While the Fed still expects a strong labor market and inflation near its goal, “uncertainties about this outlook have increased,” according to the central bank’s post-meeting statement, released Wednesday. A growing number of officials on the Fed’s policymaking committee expect to lower rates before the end of the year amid continuing trade tensions and slowing global economic growth. The Fed chair, Jerome H. Powell, said at a news conference after the Fed’s two-day meeting that officials were watching economic developments to gauge whether and when action was warranted.
The Fed is worried about weak inflation, slowing global growth and the trade war, and those factors are pushing it closer to a rate cut. But officials suggested they were not yet ready to pull the trigger, wanting to see how events played out. “The committee felt that the right thing to do was to wait and see more — and we will see a lot more on all of these issues in the very near term,” Mr. Powell said. He added that emerging risks “have caused a number of us to write down rate cuts, and a number of those who haven’t to say that the case has strengthened.”
Fed Chairman Jerome H. Powell, in a news conference after the meeting, referenced Mr. Trump’s trade disputes and softening global growth as issues that could influence the Fed’s decision to shift away from the “patient” stance it adopted earlier this year. Mr. Trump has been jawboning the Fed to cut rates and stop shrinking the large portfolio of government bonds the central bank amassed in the wake of the financial crisis as it tried to shore up the American economy. While the Fed operates independently of the White House and strives to ignore political chatter while making rate decisions, rising economic threats — some of them caused by the trade fights Mr. Trump is waging — have forced it to open the door to a cut.
“In the weeks since our last meeting the crosscurrents have re-emerged,” he said, “raising concerns about the strength of the global economy.” Many Wall Street economists said crossing the threshold was now merely a matter of timing.
Mr. Powell said the Fed made “significant changes” to its policy statement, which marked down its assessment of overall economic activity to “moderate” instead of “solid” as it did in May. “They’re clearly turning toward a more dovish direction,” said Roberto Perli, an economist at Cornerstone Macro in Washington. “The assumption is that they will cut. The question is how much, and when?”
Since the Fed’s last meeting, in May, Mr. Trump has renewed his trade fight with China, threatened tariffs on Mexico and given Japan and Europe six months to reach a trade agreement with the United States or face auto tariffs. Trade tensions have heightened uncertainty among companies, investors and foreign leaders and may be weighing on business investment. After the interest rate announcement, the S&P 500 finished the day up 0.3 percent. Defensive sectors such as health care and utility stocks, businesses that hold up well during periods of weak economic growth, led the market’s gains.
Seven Fed officials have penciled in a decrease of 0.5 percentage points by the end of the year, while one official expects a 0.25-point move, based on the Fed’s summary of economic projections. The president of the Federal Reserve Bank of St. Louis, James Bullard, dissented from the Fed’s decision to leave policy unchanged this month, arguing to start cutting. It was the first “no” vote during Mr. Powell’s 16-month tenure.
The decision to lean toward a rate cut is a significant shift for the central bank, which raised rates four times last year and adopted a “patient” stance this year. But officials have been growing nervous about the global economic outlook.
Since the Fed’s May 1 meeting, at which it also left rates unchanged, Mr. Trump has renewed his trade fight with China, threatened tariffs on Mexico and given Japan and Europe six months to reach a trade agreement with the United States or face auto tariffs. Trade tensions have heightened uncertainty among companies, investors and foreign leaders, and it may be weighing on business investment. While consumer spending remains robust, factory production is slowing and job growth has shown early signs of moderating.
Inflation has been stuck below the Fed’s 2 percent goal, which it targets to guard against economy-harming deflation, since the central bank formally adopted it in 2012. Now market expectations for inflation are sinking and the consumer outlook is wavering, increasing the risk that price gains get stuck at a permanently low level.
Against that backdrop, the Fed marked down its assessment of overall economic activity to “moderate” from “solid” in May.
“News about trade has been an important driver of sentiment,” Mr. Powell said. “We’re also looking at global growth. It’s really trade developments and concerns about global growth that are on our mind.”“News about trade has been an important driver of sentiment,” Mr. Powell said. “We’re also looking at global growth. It’s really trade developments and concerns about global growth that are on our mind.”
The Fed noted in its statement on Wednesday that “indicators of business fixed investment have been soft,” and said that “inflation for items other than food and energy are running below 2 percent,” reflecting downgrades to the language it used to describe investment and inflation after the early May meeting. Markets will now fixate on trade negotiations between the United States and China, which could be a key determinant of the economic outlook and, as a result, Fed policy. Talks between the world’s two largest economies collapsed last month, prompting Mr. Trump to raise tariffs on $200 billion worth of Chinese goods and threaten to tax nearly all of its imports. China retaliated with its own tariffs on American products.
Still, Mr. Powell said most officials thought it was too soon to act, given that recent economic developments were fluid and could be resolved in the coming months. The two sides had appeared to be at an impasse, but Mr. Trump said Tuesday that he would have an “extended meeting” with President Xi Jinping of China at the Group of 20 summit in Japan this month. The face-to-face could either defuse or escalate the trade fight. Mr. Trump has said he will make a decision about the next round of tariffs after the two leaders meet.
“Some of these developments are so recent that we want to see whether they’re sustained,” he said. Though there are economic reasons for the Fed’s greater caution, it carries a political risk: The Fed might appear to be bending to the president’s will. Mr. Trump has been blaming it for creating an unfair playing field for the United States and on Tuesday suggested that he might try to demote Mr. Powell if the central bank did not move toward easing rates.
For the first time during his tenure, Mr. Powell did not have a unanimous vote on a decision to hold rates steady. James Bullard, the president of the Federal Reserve Bank of St. Louis, dissented, indicating he wanted to cut rates at this meeting. That would be an unprecedented step, and the White House probably lacks the legal authority to make such a move. The Fed chair is a Senate-confirmed position, and the Fed is an independent agency.
And most Fed officials are predicting rate cuts. Officials indicated that they expected to cut rates next year, reducing the median Fed funds rate forecast to 2.1 percent for 2020. It currently stands at 2.25 to 2.5 percent. “I think the law is clear that I have a four-year term, and I fully intend to serve it,” Mr. Powell said when asked about the president’s comments.
“A number of those who wrote down a flat rate path agree” that the case for additional accommodation has “strengthened” since May, Mr. Powell said. “We will use our tools as appropriate to sustain the expansion.” This is the Fed’s second major policy pivot in six months. Between late 2015 and the end of last year, officials gradually raised their policy interest rate nine times to help keep the strong economy from overheating. Mr. Powell indicated early this year that the Fed was moving away from steady increases, adopting a patient stance instead as markets wobbled and growth showed signs of weakening.
One of the biggest risks to the expansion has been trade uncertainty, particularly related to China. Talks between China and the United States collapsed last month, prompting Mr. Trump to raise tariffs on $200 billion worth of Chinese goods and threaten to tax nearly all of its imports. China has retaliated on American products. That patience has given way, and the Fed is poised for its first cut since 2008, when the economy was in the depths of the Great Recession.
The two sides had appeared to be at an impasse but on Tuesday, Mr. Trump said he would have an “extended meeting” with Chinese President Xi Jinping at the Group of 20 summit in Japan later this month. That meeting, which could either defuse or escalate the trade fight, will be crucial to the Fed’s decision-making. “The bar now is low for a rate cut,” economists at UBS wrote in a note after the meeting. They had been expecting the Fed to keep rates on hold until at least later this year, but now project a 0.5-point move when the Fed meets next month.
The choice to hold rates steady came despite ongoing pressure from Mr. Trump, who on Monday suggested he might demote Mr. Powell if the central bank did not move to easing rates. The federal funds rate is now at 2.25 to 2.5 percent, much lower than it has historically been in the later years of an economic expansion. That leaves the central bank with less room to cut rates come the next recession, which could place a premium on acting decisively and early to fend off any slowdown.
When asked about the president’s comments, said: “I think the law is clear that I have a four-year term, and I fully intend to serve it.” Officials clearly see their next move as an effort to avert economic softening, rather the start of a rate-cutting cycle that takes the policy setting back toward near zero. Eight of 17 Fed policymakers see rates falling by the end of 2019, and nine expect a lower setting by the end of 2020. Not a single official projects rates that are more than 0.5 points below their current setting, meaning they expect that the cuts will be minimal.
A Fed spokesperson noted that the chairman could be removed only “for cause.” A rate cut before September could bring about a quicker end to the Fed’s plan to stop shrinking its large portfolio of bonds. Fed officials have said they wouldn’t want their process of reducing their holdings to work at cross-purposes with interest rates: While lowering borrowing costs should stimulate growth, reducing the balance sheet could curb it, at the margin.
Investors seemed to find little new information in the Fed’s policy statement at 2 p.m. Shortly after the central bank announced its decision to leave rates unchanged, the S&P 500 was up 0.3 percent. Yields on government bonds — which are closely tied to monetary policy — declined, with the yield on the 10-year Treasury note falling to 2.04 percent. “If we do provide more accommodation, we’ll certainly keep in mind what we said earlier this year, which is that we’ll always be willing to adjust balance sheet policy so that it serves our dual mandate objectives,” Mr. Powell said Wednesday. The post-meeting statement didn’t talk about balance sheet timing, and Mr. Powell said the full committee really hadn’t addressed it.
The Fed hasn’t cut rates since the end of 2008, when the Federal Open Market Committee slashed them to almost zero, an effort to stoke growth in the depths of the recession. Between late 2015 and the end of last year, officials gradually raised their policy interest rate nine times to help keep the strong economy from overheating. Besides the short-term risks to the outlook, Mr. Powell and his colleagues lowered their expectations for a less-volatile inflation gauge in the economic projections released at this meeting — they now see themselves missing their 2 percent price goal until 2021. Some are worried about the slower pace of progress, Mr. Powell said.
But Mr. Powell indicated early this year that the Fed was pivoting away from steady increases, adopting a patient stance instead as markets wobbled and growth showed signs of weakening. The federal funds rate is now at 2.25 to 2.5 percent, much lower than it has been in the later years of an economic expansion. That leaves the central bank with less room to cut rates come the next recession. While wages are rising, it’s “not at a pace that would provide much upward impetus to inflation,” he noted in his statement. “Moreover, weaker global growth may continue to hold inflation down around the world.”
Policymakers see rates returning to 2.4 percent in 2021 and hovering at 2.5 percent in the longer run, based on the median projection. That’s down from a longer-run expectation of 2.8 percent in March, suggesting the Fed would have even less room to cut rates in future recessions than previously thought.
Fed officials are working against a fraught political backdrop. The central bank is independent of the White House and Mr. Trump appointed Mr. Powell as its head, but the president regularly criticizes the central bank for having lifted rates too many times last year. Mr. Trump ramped up those attacks this week, saying that Fed policy was putting the United States on an uneven playing field and hinting that he could consider the unprecedented move of attempting to demote Mr. Powell.
“They’re going to be making an announcement pretty soon, so we’ll see what happens,” Mr. Trump said, when asked by a reporter whether he would try to strip Mr. Powell of his chairmanship. “I want to be given a level playing field, and so far I haven’t been.”
Investors saw a slim chance of a rate cut in June. Before the meeting on Wednesday, they saw an 80 percent chance of a rate cut in July.
The Fed lowered its expectation slightly for long-run sustainable unemployment to 4.2 percent from 4.3 percent in March. Officials also soured on inflation: The median one now sees a less-volatile price gauge closing out the year at 1.8 percent and 1.9 percent in 2020. The Fed had previously expected the gauge to hit its 2 percent target by the end of 2019.
Until today, there had never been a dissent under Mr. Powell’s watch — the last time anyone voted against a decision was in December 2017 under Chairwoman Janet L. Yellen, when the Chicago Fed President Charles Evans and Minneapolis President Neel Kashkari indicated they would have preferred easier policy.