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.”