Fed scraps its ‘patient’ interest rate approach in prelude to potential cut
The Federal Reserve indicated a readiness to lower interest rates for the first time in more than a decade, citing “uncertainties” in the outlook that have increased the case for a cut as officials seek to prolong the near-record U.S. economic expansion.
While Chairman Jerome Powell and fellow policy makers left their key rate in a range of 2.25 per cent to 2.5 per cent on Wednesday, they dropped a reference in their statement to being “patient” on borrowing costs and forecast a larger miss of their 2 per cent inflation target this year. Powell has been repeatedly pressured by President Donald Trump to juice the economy by cutting rates.
“My colleagues and I have one overarching goal, to sustain the economic expansion,” Powell told a press conference following the decision, noting that many policy makers see a strengthened case for a cut.
U.S. stocks rose after the decision and Treasuries erased losses. Yields on benchmark 10-year Treasuries fell to 2.03 per cent. Fed funds futures priced in increased odds of a rate cut at the July meeting.
The change in tone follows attacks on the Fed by Trump for not doing more to bolster the economy and Tuesday’s report by Bloomberg News that the president asked White House lawyers earlier this year to explore his options for demoting Powell from the chairmanship.
Powell, responding to a reporter’s question, said he thinks “the law is clear that I have a four-year term and I fully intend to serve it.”
He declined to comment directly on the president’s public criticism of the central bank, but said the Fed is “deeply committed to carrying out our mission” and that its independence from politics is an “important institutional feature that has served the economy and the country well.”
The Fed still expects a strong labour market and inflation to be near its goal but “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 seeking a quarter-point rate cut. His vote marked the first dissent of Powell’s 16-month tenure as chairman.
Policy makers were starkly divided on the path for policy. Eight of 17 penciled 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 Trump’s trade war is slowing the economy’s momentum and that rates are too restrictive given sluggish inflation.
Trump’s attacks on the Fed risk casting a political shadow over whatever policy decision the Fed makes, though Powell and his colleagues say they’re 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 labour 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 don’t expect a move until December.
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 bank’s 2 per cent target despite unemployment being at a 49-year low.
What Our Economists Say
“Bloomberg Economics retains the view that if economic data firm somewhat and trade tensions cool, the Fed may avoid embarking on insurance cuts — or at the very least will deliver far less accommodation than what markets have started to price in.” –Carl Riccadonna, Yelena Shulyatyeva and Eliza Winger
Central bankers are likely hoping for greater clarity over Trump’s trade war with China. Stocks jumped on Tuesday after the president said he would meet Chinese leader Xi Jinping at next week’s Group of 20 summit in Japan.
The Fed, which raised interest rates four times last year and as recently as December projected further hikes in 2019, isn’t alone in changing tack. European Central Bank President Mario Draghi on Tuesday paved the way for a rate cut, and central banks in Australia, India and Russia have lowered borrowing costs this month.