Fed chairman's comments open door to possibility of a rate cut

Chicago

THE Federal Reserve will respond "as appropriate" to the risks posed by a global trade war and other recent developments, Fed chairman Jerome Powell said on Tuesday in remarks that seemed to open the door to the possibility of a rate cut.

In a brief statement included as part of a speech on broader monetary policy issues, Mr Powell said the Fed was "closely monitoring the implications" of a trade dispute that has, since the Fed's last meeting, disrupted global bond and equity markets and posed risks to US and world economic growth.

"We don't know how or when these issues will be resolved," Mr Powell said. "As always, we will act as appropriate to sustain the expansion, with a strong labour market and inflation near our symmetric 2 per cent objective." His remarks did not include a reference to the current Fed target interest rate as appropriate, or repeat the pledge to be "patient" before raising or lowering rates again - both standard talking points in recent Fed statements.

The comments also reflect a diminishing faith at the central bank that the Trump administration will resolve its disputes with top trading nations in a way and on a timetable that poses little risk to US economic growth.

Mr Trump's multi-front trade wars, including the exchange of punishing tariffs with China, and new threats to hit Mexico with tariffs, have undercut business confidence and raised prices for manufacturers.

Many forecasters cite trade disputes as the main risk to the outlook and expect the US and global economies to slow. An increasing number predict the Fed will have to act to stimulate growth as early as this year. After four increases in the benchmark lending rate last year, Mr Powell and his Fed colleagues have this year repeatedly said they can remain patient while they gauge how the economy progresses.

But the prospect of increased world tariffs and a protracted trade battle led St Louis Fed president James Bullard to back a rate cut this week, and have increased market bets that the Fed would set its promise of patience aside and lower borrowing costs.

The Fed has been on hold since its last rate increase, in December, when it set the target federal funds rate in a range of between 2.25 per cent and 2.5 per cent.

Though low by historical standards, the rate is currently around the level officials feel is "neutral," in effect letting the economy stand on its own and neither encouraging nor discouraging investment and spending.

The trade comments opened remarks that set a sombre tone about the dilemma the Fed faces. With interest rates and inflation mired at such low levels, Mr Powell said, future downturns are likely to force the central bank to again cut rates to zero and resort to "unconventional" tools like bond buying to support the economy.

"There will be a next time," Mr Powell said in opening a two-day conference devoted to a discussion of whether to try to jolt inflation and interest rates higher, or plan for more massive rounds of asset purchases.

Interest rates so close to zero "has become the preeminent monetary policy challenge of our time," Mr Powell said. "Perhaps it is time to retire the term 'unconventional' when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in the future." REUTERS, AFP