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The Federal Reserve’s top policy makers aren’t yet ready to cut interest rates, but worsening trade tensions are nudging them in that direction.
In separate comments Tuesday, Fed Chair Jerome Powell and his No. 2, Richard Clarida, reassured nervous investors they’re watching closely for signs that disputes between the U.S. and its trading partners are denting the outlook for the world’s largest economy. Their remarks moved the Fed slightly closer to its first rate cut since 2008.
“Powell may have opened the door a crack wider to the possibility that the Federal Reserve will ratify one or two of the rate cuts the markets have discounted this year,’’ said Chris Rupkey, chief financial economist at MUFG Union Bank NA.
Other Fed watchers said Powell and Clarida fell short of signaling a move at the June 18-19 gathering of the Federal Open Market Committee. Clarida declared the Fed “can’t be handcuffed” by market pricing that can be volatile.
Nonetheless, their acknowledgment of risks posed by the deepening trade spats lent comfort to investors, who have aggressively increased bets the central bank will ease this year. The S&P 500 Index of U.S. stocks jumped 2.1% Tuesday, the most since January, while the yield on 10-year U.S. Treasuries rose from Monday’s 20-month low.
‘Buying Time’
“Powell is essentially telling the markets that the Fed is alert to what’s happening,’’ said Roberto Perli, a partner at Cornerstone Macro LLC in Washington and former Fed economist. “But at the same time it’s too soon to judge the impact on the U.S. outlook because, as he says, nobody can know how the situation will evolve. So he seems to be buying time.’’
Chicago Fed President Charles Evans, who votes on policy this year, said Wednesday he still sees the economy’s fundamentals as “solid,” but was concerned about continued weak inflation.
“I’m a little nervous about the low inflation rate,” Evans said in an interview with Bloomberg Television’s Michael McKee. “That by itself could be a reason for a little more accommodation.”
In a separate interview on BTV Wednesday, Dallas Fed chief Robert Kaplan said he’d want to to see more evidence the economy is slowing before backing a rate cut. Kaplan doesn’t vote on policy this year.
“It’s early to make a judgment on that,” Kaplan said. “We’re going to be very vigilant in understanding these heightened trade tensions. See if they feed through to the economy. Most importantly, see if they persist.”
Financial markets took their latest turn after President Donald Trump threatened last week to slap new tariffs on Mexico unless it stemmed migrant flows to the U.S. That comes atop deteriorating negotiations between the U.S. and China over a lengthy list of trade and commercial disputes that have led to raft of new levies in both directions.
Speaking at Fed conference in Chicago Tuesday, Powell referred to “trade negotiations and other matters,” before saying, “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion.”
Clarida later told CNBC television the Fed will watch incoming economic indicators carefully to determine whether any move is warranted.
“As we said in May, we think policy was in a good place then and we’re going to let the data flow in to indicate if we need to make any adjustments,” Clarida said. “Whether or not that means acting preemptively or when the data comes in is just going to depend on the context at the time.” The Fed in May pledged to be “patient” as it judges future rate moves.
Data Points
Officials will get two important new data points this week. A gauge of U.S. service industries, the ISM non-manufacturing index for May, is due out Wednesday, while the Labor Department is scheduled to release its May jobs report Friday.
“The Fed is being just as patient about lowering rates as it was about raising rates,’’ said Mark Vitner, a senior economist at Wells Fargo (NYSE:WFC) & Co. in Charlotte, North Carolina. “While the markets have reacted so viscerally to the ratcheting up in the trade rhetoric, the Fed needs some time to see how it will play out.’’
James Bullard, head of the St. Louis Fed and also a voter this year, became the first policy maker to signal likely support for a rate cut. In a speech Monday he said a reduction “may be warranted soon” to boost below-target inflation.
The prospect of lowering rates will likely cause some unease at the Fed. That’s because with the target range for their benchmark rate currently at 2.25% to 2.5%, officials are already wringing their hands over how little room they have to slash borrowing costs in the event of a recession before hitting zero.
In remarks linked to those longer-run worries, Powell on Tuesday said the proximity of rates to zero represented “the preeminent monetary policy challenge of our time.”
(Updates with Evans and Kaplan comments from seventh paragraph.)