By Craig Torres
The Federal Reserve indicated a readiness to cut interest rates for the first time in more than a decade to sustain a near-record U.S. economic expansion, citing “uncertainties” in their outlook.
While Chairman Jerome Powell and fellow policy makers left their key rate in a range of 2.25% to 2.5% on Wednesday, they dropped a reference in their statement to being “patient” on borrowing costs and forecast a larger miss of their 2% inflation target this year. Powell has been repeatedly pressured by President Donald Trump to juice the economy by cutting rates.
U.S. stocks rose after the decision and Treasuries erased losses. Yields on 2-year Treasury yields dropped over 5 basis points to 1.81%, while benchmark 10-year rates broke below 2.05%. Fed funds futures priced in increased odds of a rate cut at the July meeting.
While inflation near the goal and a strong labor market are the most likely outcomes, “uncertainties about this outlook have increased, the Federal Open Market Committee said in the statement following a two-day meeting in Washington. “In light of these uncertainties and muted inflation pressures, the Committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”
The FOMC vote was not unanimous, with St. Louis Fed President James Bullard dissenting in favor of a quarter-point rate cut. His vote marked the first dissent of Powells tenure as chairman.
Policy makers were starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of the year as another eight saw no change and one forecast a hike, according to updated quarterly forecasts.
In the statement, officials downgraded their assessment of economic activity to a “moderate” pace from “solid” at their last gathering.
The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that President Donald Trumps trade war is slowing the economys momentum and that rates are too restrictive given sluggish inflation.
The change in tone follows attacks on the Fed by Trump for not doing more to bolster the economy and Tuesdays report by Bloomberg News that the president asked White House lawyers earlier this year to explore his options for demoting Powell from the chairmanship.
That risks casting a political shadow over whatever policy decision the Fed makes, though Powell and his colleagues say theyre focusing only on the economic goals Congress gave them.
Officials noted that “growth of household spending appears to have picked up from earlier in the year” and that indicators of business fixed investment “have been soft.” They repeated that the labor market “remains strong.”
Investors have been betting the Fed will reduce rates at its next meeting in late July, though a majority of economists surveyed earlier this month dont expect a move until December. Yields on 10-year Treasuries have fallen to the lowest since 2017. The hope of fresh stimulus has sent U.S. stocks to near a record.
Recent U.S. economic data have been mixed. Consumer spending held up in May but job gains were disappointing, and some gauges of business sentiment have cooled on uncertainty around the outlook for trade. The Fed remains bedevilled by inflation continuing to undershoot the central banks 2% target despite unemployment being at a 49-year low.
Central bankers are likely hoping for greater clarity over Trumps trade war with China. Stocks jumpeRead More – Source