Fed Holds Rates Steady but Cracks Open the Door to a Cut
WASHINGTON — Federal Reserve officials left rates unchanged at their June meeting but signaled that they were prepared to cut if trade tensions worsen and risks to the American economy intensify.
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. Fed officials marked down their assessment of overall economic activity, calling it “moderate” instead of May’s “solid.”
Fed Chairman Jerome H. Powell, in a news conference following the meeting, pointed to President Trump’s renewed trade war with China and softening global growth as reasons the Fed may shift away from it’s “patient” stance and move toward a rate cut in the coming months.
“In the weeks since our last meeting the crosscurrents have re-emerged,” he said, “raising concerns about the strength of the global economy.”
The policy-setting committee is increasingly divided. While the central official among the Fed’s 17 policymakers expects to leave rates unchanged this year, a growing number of decision makers expect to reduce rates.
And 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 lower rates at this meeting.
“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.”
The decision to hold rates steady came despite ongoing pressure from President Trump, who on Monday suggested he might demote Mr. Powell if the central bank did not move toward easing rates.
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.
The Fed hasn’t cut rates since the end of 2008, when the Federal Open Market Committee slashed them to near zero in an effort to stoke growth in the depths of the Great 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.
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.
Congress charges the Fed with maintaining the maximum level of employment consistent with slow and steady inflation, and the central bank targets 2 percent yearly price gains — a level low enough to ward off deflation, which encourages cash hoarding, yet not harmful to consumers. The Fed hasn’t hit that target since formally adopting it in 2012, and inflation expectations have recently shown signs of slipping.
But the Fed’s job in managing the economy has been complicated by Mr. Trump’s trade fights, including a tariff war with China that could either worsen or de-escalate later this month after the president meets with Chinese President Xi Jinping at the Group of 20 summit in Japan. The tensions have heightened uncertainty and may be weighing on business investment.
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 following the early May meeting.
Against that worsening backdrop, officials indicated that they expected to cut rates next year, reducing the median Fed funds rate forecast to 2.1 percent for 2020.
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 lifting 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.”
A Fed spokesperson noted that the chairman can only be removed “for cause.” Mr. Powell said in a “60 Minutes” interview earlier this year that “the law is clear that I have a four-year term. And I fully intend to serve it.”
Investors saw a slim chance of a rate cut in June. Before the meeting, they saw an 80 percent chance of a rate cut in July.
The Fed slightly lowered its expectation for long-run sustainable unemployment to 4.2 percent, down 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 someone voted against a decision was December 2017 under Chairwoman Janet L. Yellen, when the Chicago Fed President Charles Evans and Minneapolis President Neel Kashkari would have preferred easier policy.