Jay Powell, US Federal Reserve chairman, has warned that risks to global growth have increased in recent weeks, reinforcing expectations that the central bank is likely to trim interest rates next month.
In a speech on Tuesday, Mr Powell warned that businesses and farmers are becoming more concerned about trade tensions, resulting in a drop in business confidence. His comments suggest the Fed is unlikely to return to raising rates any time soon and could cut them, despite what he described as “solid fundamentals . . . supporting continued growth”.
Mr Powell said: “When the FOMC [Federal Open Market Committee] met at the start of May, tentative evidence suggested these cross-currents were moderating, and we saw no strong case for adjusting our policy rate.
“Since then, the picture has changed. The cross-currents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.”
The Fed last week decided to keep interest rates on hold, while striking a dovish tone and warning about “uncertainties” to the economic outlook. On Tuesday Mr Powell repeated that “an ounce of prevention is worth more than a pound of cure” — a hint that the Fed is moving towards embracing the argument for precautionary “insurance” cuts to interest rates.
However, the chances of a bigger-than-usual half-point lowering of rates faded somewhat on Tuesday, after James Bullard, the president of the St Louis Fed, told Bloomberg TV that a rate cut of 50 basis points at the Fed’s next meeting in July “would be overdone”, adding that he would be willing to back a cut of 25bp.
The lack of enthusiasm for a half-point rate cut from one of the Fed’s biggest doves — and the only one to vote for lower rates at last week’s meeting — led traders to ratchet back bets on a large move at the next meeting in July. The markets-implied odds on a 50 bps cut fell from 40 per cent earlier on Tuesday to 27 per cent.
It also weighed on the S&P 500, which was down 0.9 per cent in afternoon trading in New York, and handed the US dollar index its biggest gain in almost two weeks.
The US central bank’s dovish shift comes amid strident and sustained attacks on its actions from Donald Trump, the US president, who has pushed publicly for the Fed to reduce rates since last year.
Mr Trump renewed his criticism of the central bank on Monday, tweeting: “Despite a Federal Reserve that doesn’t know what it is doing — raised rates far too fast (very low inflation, other parts of world slowing, lowering & easing) & did large scale tightening, $50 Billion/month, we are on course to have one of the best Months of June in US history.”
The president added: “Think of what it could have been if the Fed had gotten it right. Thousands of points higher on the Dow, and GDP in the 4’s or even 5’s. Now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what other countries are doing against us. Blew it!”
Mr Powell insisted he would not be swayed by such short-term political pressures. He said on Tuesday: “The Fed is insulated from short-term political pressures — what is often referred to as our ‘independence’. Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests.”
