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 Fed's 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 over as chairman 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, which would allow 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 noq 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 1 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 15:31 ET (19:31 GMT)

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