By Nick Timiraos
WASHINGTON -- Federal Reserve officials held their benchmark
interest rate steady on Wednesday, but hinted they would cut rates
in the months ahead if the economic outlook weakens.
"The case for somewhat more accommodative policy has
strengthened," Fed Chairman Jerome Powell said at a news conference
after the central bank announced its decision.
While the Feds rate-setting committee expected the economy's
expansion to continue, "uncertainties about this outlook have
increased," it said in a statement. "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."
Nine of 10 members of the rate-setting committee voted to
maintain the federal-funds rate in a range between 2.25% and 2.5%.
St. Louis Fed President James Bullard dissented in favor of
lowering rates, the first dissent since Fed Chairman Jerome Powell
took lead of the central bank in February 2018.
Interest-rate projections released Wednesday showed eight of 17
officials project the Fed will need to cut the benchmark rate this
year, with seven of those officials seeing two quarter-point
reductions. Only one official projected the Fed would need to raise
interest rates this year, with the remaining eight seeing that
rates would stay unchanged.
A majority of officials projected the benchmark rate would sit
below its current level by the end of 2020.
The rate projections highlight two different possible
trajectories for the economy that have surfaced amid an escalation
of trade tensions in recent weeks. Under one, trade negotiations
avoid further disruption of global supply chains and prevent drags
on business investment, allowing for the Fed to hold rates
steady.
Under the other, escalating trade tensions and weak global
growth leads to a sharper slowdown for the U.S. economy, warranting
interest-rate reductions by the Fed.
Bond investors expect the Fed will cut rates at least twice this
year, with market participants anticipating the first cut at the
central bank's next meeting, on July 30-31.
Officials also broadly lowered their projections of the interest
rate to a level consistent with neither spurring nor slowing
growth, a sign that more officials believe the Fed's rate stance is
providing less support to the economy than previously thought. A
narrow majority of officials now project this neutral rate stands
at around 2.5%. In March, the median projection of this neutral
rate of interest stood at 2.75%.
Officials left mostly unchanged their projections about economic
growth over the next 2 1/2 years. They now expect inflation,
excluding volatile food and energy prices, to end the year up 1.8%,
versus their March projection that inflation would hold at the
Fed's 2% target. They don't expect inflation to reach that target
until 2021.
Officials have expected the economy's growth rate to slow to
around 2% this year from 3% last year, and recent data provide
little obvious indication of a sharper slowdown outside of the
industrial sector.
Inflation this year has held below the Fed's 2% target, with
prices excluding volatile food and energy categories up 1.6% in
April. The Fed's postmeeting statement flagged how inflation has
fallen and further observed that market-based measures of inflation
have declined.
Hiring slowed in May, with the three-month average in monthly
payroll growth falling to 151,000 from 245,000 in January. The
current pace is still a level high enough to accommodate new
entrants to the labor force, and the unemployment rate held steady
at 3.6% in May, a 49-year low.
The Fed's statement characterized the labor market as strong and
economic activity rising at a moderate rate, a slightly less
optimistic description than in the central bank's statement last
month. "Indicators of business fixed investment have been soft,"
the statement said.
Trade policy has been a significant wild card for the Fed.
Chairman Jerome Powell pushed back against market expectations of a
rate cut later this year after the central bank concluded its April
30-May 1 meeting. He cited optimism about trade negotiations with
China as one reason for a solid economic outlook.
A few days later, President Trump announced he would increase
tariffs on Chinese imports after negotiations faltered. Later, he
threatened to impose tariffs on Mexico to force greater curbs on
migration.
Mr. Trump suspended those tariffs earlier this month after the
Mexican government pledged to redouble efforts to stem the flow of
asylum-seeking Central American refugees at the U.S. southern
border.
Mr. Trump has called on the Fed to cut its benchmark rate by one
percentage point. On Tuesday, the president responded to months-old
speculation that he would try to remove Mr. Powell as Fed chairman
by answering obliquely, "Let's see what he does." The Fed doesn't
believe the law allows Mr. Trump to do this.
Mr. Trump tapped Mr. Powell -- a veteran of the Treasury
Department under the administration of George H.W. Bush who has
served on the Fed's board since 2012 -- to lead the central bank in
2017. Last year, Mr. Trump sharply criticized the Fed for raising
rates, fueling speculation from market participants that Mr. Powell
was responding to political pressure when he signaled an end to
rate increases this year.
Publicly, Mr. Powell has strenuously denied that politics
influence the Fed's decisions, and privately, he has told
colleagues he recognizes history will judge him on whether his
decisions are based on economic analysis and on whether he tunes
out an unprecedented level of presidential haranguing.
With the U.S. economy doing "reasonably well," moving to cut
rates as aggressively as Mr. Trump wants right now "would destroy
the independence of the Fed.... It is not something which should be
done," said Stanley Fischer, who served as the Fed's vice chairman
from 2014 to 2017, on Tuesday.
Write to Nick Timiraos at nick.timiraos@wsj.com
(END) Dow Jones Newswires
June 19, 2019 14:58 ET (18:58 GMT)
Copyright (c) 2019 Dow Jones & Company, Inc.