By Nick Timiraos 

WASHINGTON -- Federal Reserve officials held interest rates steady on Wednesday but strongly suggested they would cut them in the months ahead if an economic outlook clouded by uncertainty over trade policy didn't improve.

"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. Still, citing recent favorable economic data, The Fed didn't bow to pressure from President Trump for an immediate rate cut.

U.S. stocks rose toward record highs. The S&P 500 added 8.71 points, or 0.3%, to 2926.46, leaving the index just 0.7% from its record high in April. The benchmark 10-year Treasury yield fell for the seventh straight session to 2.023%, its lowest level since November 2016, from 2.060% on Tuesday.

The Fed is set to meet next on July 30-31, and investors in interest-rate futures markets have priced in at least a quarter-percentage-point cut then in the central bank's benchmark short-term rate. "The market now knows the Fed is going to ease unless the data dramatically reverse," said Steven Blitz, chief U.S. economist at TS Lombard.

Since Fed officials met last month, escalating trade tensions between the U.S. and China and weaker global growth have raised the risks of a sharper slowdown for the U.S. economy than they had anticipated this year.

"It's really trade developments and concerns about global growth that are on our minds," Mr. Powell said. Because many of these issues had arisen suddenly, many Fed officials wanted to wait a little longer before cutting rates, he said.

For the Fed to not cut rates at its July meeting, "it would take all of the data coming in to be consistently strong," together with an end to trade-related uncertainty, said Seth Carpenter, chief U.S. economist at UBS.

The central bank's rate-setting committee on Wednesday dropped language from its policy statement describing its stance as "patient" -- which implied rates were on hold. Instead, it said uncertainties about the economic outlook have increased, a phrase it has used during past periods of rate cuts.

"The committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion," the statement said.

Interest-rate projections released Wednesday showed eight of 17 officials -- the reserve bank presidents and board governors who participate in the Fed meetings -- expect they will cut the benchmark rate by year's end from its current level in a range between 2.25% and 2.5%. Seven of those officials see lowering the rate by a half percentage point by the close of 2019, and one expects just a quarter-percentage-point reduction. Eight officials projected the Fed would hold rates steady, and one projected a rate increase.

"What surprised us most was the number of participants that shifted down to rate cuts. It was about half the committee," said Tiffany Wilding, U.S. economist at Pimco. "That several people view this no longer as a risk case, but their base case, is very notable."

Moreover, even though some officials didn't project rate cuts, "our deliberations made clear that a number of those [officials] agree that the case for additional accommodation has strengthened," said Mr. Powell.

Mr. Powell said there was "not much" support for cutting rates at the meeting, and the vote to hold rates steady passed on a 9-1 vote. St. Louis Fed President James Bullard dissented from the rate decision, preferring lower rates. It was the first dissenting vote cast since Mr. Powell became Fed chairman in February 2018, after he was named by Mr. Trump.

If the Fed lowers rates next month, it would be the first cut since 2008, when the central bank lowered rates to near zero during the financial crisis. It held them at that low level for seven years.

The Fed has initiated a sequence of rate cuts four times in the past 25 years. In 2001 and 2007, a recession began within three months. In 1995 and 1998, the Fed lowered rates in time to prevent an economic slowdown from turning into a full-fledged downturn, and officials later reversed some of those cuts.

Mr. Powell said the Fed was prepared to react aggressively to any weakness, drawing from research that says when rates are historically low, as they are now, officials should move faster and sooner because they have less room to cut hem. "In other words, an ounce of prevention is worth a pound of cure," he said.

Fed officials have been trying to navigate a so-called soft landing, in which inflation stays contained and growth moderates but doesn't slow so much that the economy tips into recession.

To that end, officials raised rates four times last year and in December projected several more rises would be needed this year and next. Slowing global growth and muted inflation earlier this year led Mr. Powell to signal an earlier end to rate rises.

More recently, the global economic outlook and uncertainty over Mr. Trump's trade policies have led to a pullback in business investment and sentiment.

"Trump is providing the headwinds the Fed thought they'd have to provide" through their rate increases, said Vincent Reinhart, chief economist at Mellon and a former senior economist at the Fed. "The risk is that you slow the global expansion of trade too much and put the economy into a stall."

With the Fed meeting out of the way, markets are likely to focus now on the prospects for Mr. Trump and Chinese President Xi Jinping to put trade negotiations back on track during a meeting at next week's G-20 world leader summit in Japan.

By ratifying market expectations for future rate cuts and avoiding a selloff in stocks Wednesday, Mr. Powell "put the responsibility to hold the market up back on Trump," said Mr. Blitz. "The market reaction 100% belongs to Trump now, in terms of what comes out of the meeting next week."

The Fed's rate projections highlighted 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, worsening trade frictions and weak global growth lead to a sharper slowdown for the U.S. economy, warranting Fed rate reductions.

Mr. Trump has called on the Fed to cut its benchmark rate by 1 percentage point. As the Fed began its two-day policy meeting on Tuesday, Mr. Trump responded to months-old speculation that he would try to remove Mr. Powell as Fed chairman by saying obliquely, "Let's see what he does."

Mr. Powell suggested Wednesday he didn't believe the law gave Mr. Trump the authority to remove him. "I have a four-year term, and I fully intend to serve it," he said.

Mr. Trump nominated 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, the president 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. Privately, he has told colleagues he recognizes history will judge him on whether his decisions are based on economic analysis, ignoring political pressures.

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 former Fed Vice Chairman Stanley Fischer at a conference in Portugal on Tuesday.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

June 19, 2019 19:40 ET (23:40 GMT)

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