Federal Reserve opens door to rate cut amid growing 'uncertainties'

[WASHINGTON] The Federal Reserve on Wednesday opened the door to an interest rate cut soon, vowing to act to keep the economy growing as uncertainties about trade and other issues mount.

US Federal Reserve chief Jerome Powell said that trade friction and slowing growth worldwide have led many central bankers to feel the case for an interest rate cut has "strengthened" but that they want to see more data before moving.

The central bank left the benchmark lending rate unchanged but one policymaker dissented in the vote, advocating for an immediate cut instead - something President Donald Trump has been calling for loudly.

The policy-setting Federal Open Market Committee kept the key rate in the 2.25-2.5 per cent range but said "uncertainties about this outlook have increased" and the Fed "will act as appropriate to sustain the expansion."

After the meeting, Mr Powell told reporters policy could soon become more "accommodative," a byword for easing policy.

"Uncertainties surrounding the outlook have clearly risen since our last meeting" and officials are "mindful of ongoing cross currents, including trade developments and concerns about global growth," he said.

"While the baseline outlook remains favorable," he said, "many FOMC participants now see that the case for somewhat more accommodative policy has strengthened."

But he cautioned that it is important they not overreact to single bits of data or a "short-term swing in sentiment."

Markets are almost universally predicting multiple Fed moves this year and seem to view the Fed stance as dovish enough for now, with the three major stock indexes closing with modest gains following the announcement.

However, Mr Trump may be disappointed not to get a rate cut, since he has accused the Fed of undercutting his efforts to supercharge the economy.

He even hinted on Tuesday he might remove Mr Powell from his post, but the Fed chairman said Wednesday he believes the law is clear that he has a four-year term.

"I fully intend to serve it," he said.

Mr Trump on Tuesday also bashed European Central Bank chief Mario Draghi, saying his signal of more stimulus ahead would put the United States at a disadvantage against a weaker euro, which would make American exports less competitive.

Mr Powell declined to wade into that debate or comment on the exchange rate, saying only that the central bank does not use interest rate policy to effect the American currency.

He said, "we don't target the dollar... we will target our domestic economic and financial conditions and not our exchange rate."

DOVISH TILT

The closely-watched Fed statement included a marked shift in language, no longer saying the central bank will remain "patient" in assessing economic data.

Instead, the FOMC "will act as appropriate to sustain the expansion."

James Bullard, president of the Fed's St Louis regional branch, voted against the decision, saying he wanted to see the federal funds rate cut by 25 basis points at this meeting.

Mr Bullard earlier this month was to first central banker to give voice to the expectations of financial markets that economic conditions would require the Fed to act, saying a rate cut could be needed "soon."

The quarterly forecasts issued by the central bankers on Wednesday revealed a decidedly more dovish tilt, with far fewer now expecting a rate hike this year. However, committee members were spilt on whether to keep the key rate where it is now or lower it.

But the projections did not reflect much change in the outlook for the economy: the median estimates for growth and unemployment were essentially unchanged compared to March, while the forecast for inflation was cut to 1.5 per cent from 1.8 per cent previously.

The statement said the Fed still sees a continued economic expansion and inflation at long last rising to the two percent target as the most likely outcome.

But it now clearly recognises concerns on the horizon, pointing to growth that is only "moderate" and "soft" business investment.

AFP