Jay Powell, chairman of the Federal Reserve, signalled the central bank stood ready to cut interest rates, saying it would “act as appropriate to sustain the expansion” amid the economic impact of escalating trade wars.
“We do not know how or when these issues will be resolved,” he said, in remarks that helped stoke a powerful rally on Wall Street. “We are closely monitoring the implications of these developments for the US economic outlook.”
Mr Powell was addressing a conference hosted by the Federal Reserve Bank of Chicago, part of a year-long review of how the central bank carries out and communicates its monetary policy objectives.
Referring to tariffs, which in the past month have been raised on imports from China and threatened on imports from Mexico, he said that the Fed would “act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric 2 per cent objective”.
“I suspect [Mr Powell] goes to bed every night praying for a trade deal, and not just because that would be the best outcome for the country,” said Ian Shepherdson, chief economist for Pantheon Macroeconomics.
Mr Powell’s speech comes alongside similar comments from other Fed officials, often a sign that the Federal Open Market Committee wants investors to prepare for a shift in policy.
On Monday, James Bullard, president of the Federal Reserve Bank of St Louis and a voting member of the committee, said that a rate cut might be “warranted soon,” and that current interest rates might be “inappropriately high”.
And Richard Clarida, the Fed’s vice-chairman, said on Tuesday that he would be inclined to look past any temporary boost tariffs deliver to inflation, as he focused instead on the growth implications of the trade tensions.
“If we get a sense that . . . growth is slower than we expect and that underlying inflation is below where we want it to be, then as chair Powell and I and others have indicated we are going to put in place appropriate policy to achieve those goals,” he said in an interview with CNBC after Mr Powell spoke. “Whether or not that means acting preemptively or when the data comes in is just going to depend on the context at the time.”
Financial markets are indicating it will be almost impossible for the Fed to resist cutting rates this year, with the most likely outcome that there will be two quarter-point reductions by the end of December. There is also an almost one-in-three chance of three cuts, according to futures pricing.
Mr Powell’s comments briefly dinged the yields on government bonds, especially on the two-year Treasury, which is one of the instruments most sensitive to Fed policy. In recent weeks, bond yields have fallen as investors, fearing a sharp economic slowdown, have sought the safety of government debt. On Tuesday they were rebounding as some of the pessimism dissipated.
While the two-year yield fell by 4 basis points after Mr Powell spoke, it later resumed its rise as traders concluded the Fed would use potential rate cuts as an insurance policy to keep the economy growing.
Equity markets were also rebounding sharply on Tuesday, with the S&P 500 up over 1.8 per cent by mid-afternoon in New York.
“The Fed has come out and said they are listening,” said Jon Hill, an interest rate strategist at BMO Capital Markets. “They are beginning to pivot from a ‘patient’ stance to a ‘ready to act’ stance. That allows the market to reduce the chance of the worst-case scenario.”
Carl Weinberg, chief international economist for High Frequency Economics, said he was sceptical that a change is coming, and said that Mr Powell was just “reiterating the Fed’s mandate”. With the unemployment rate at 3.6 per cent, the bank’s more pressing challenge, he said, is to stop labour markets from tightening further, he said.
The next read on the US labour market comes on Friday, when the May jobs report is released.
With expectations of an interest-rate cut increasing, the Federal Reserve is taking an unprecedented, sweeping year-long review of its policy objectives. Mr Powell focused his speech on Tuesday mostly on this review, pointing out the difficulty the bank has had in reaching and sustaining its target of 2 per cent inflation.
The review is designed to consider different ways to hit its inflation target, whether it needs new tools to meet its statutory objectives and whether the Fed needs to improve how it communicates with markets, he said.
Additional reporting by Joe Rennison