Fed opens door to rate cuts under pressure from Trump

The Federal Reserve announced Wednesday that it would hold interest rates steady for the next month but suggested it could soon cut rates if inflation remains low and global headwinds strain the U.S. economy.

The Fed was widely expected to keep interest rates even in June while opening the door to a cut as soon as July, but faced intense pressure from President Trump and Wall Street to lower rates this month.

While Fed officials expressed concerns about the rising costs of trade tensions and slowing global growth, the central bank said Wednesday that the economy did not yet need stimulus from cheaper money.{mosads}

“The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective as the most likely outcomes, but uncertainties about this outlook have increased,” said the rate-setting Federal Open Markets Committee (FOMC) in a Wednesday 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.”

All but one of the 12 FOMC members with votes supported holding rates steady.

But seven FOMC officials projected the Fed to cut rates twice by the end of 2019, while one expected one cut. Of the nine remaining FOMC members, eight expected the Fed to hold rates steady through the year, while one member projected one more rate hike.

“There was not much support for cutting rates now, at this meeting,” Federal Reserve Chairman Jerome Powell said Wednesday. He noted that of the FOMC members that projected cuts, “all of those but apparently one felt that it would be better to see more before moving.”

The central bank’s shift toward a potential cut comes as Powell and the bank face intense scrutiny and unprecedented political pressure.

As the economy recovered from the 2008 recession, the Fed began to gradually hike interest rates from near-zero levels in 2015. The bank sought to slowly raise borrowing costs to stave off inflation and give the Fed room to respond during the next economic downturn.

Four years and nine rate hikes later, the Fed may soon reverse course and cut rates to stretch out the nearly decadelong recovery from the recession.

The U.S. economy appears to be slowing from a burst of growth in 2018, even as unemployment remains near record lows. The rising costs of Trump’s trade war with China, inconsistent economic data and slowing growth abroad also pose threats to U.S. growth.

Powell said that since the FOMC’s last meeting in May, a batch of weak data from China and Europe and heightened concerns about the escalating U.S.-China trade war raised risks to the economy.

“Our continued patient stance seemed appropriate, and the committee saw no strong case for adjusting our policy rate,” Powell said. “In the weeks since our last meeting, those crosscurrents have reemerged.”

Advocates for a rate cut also cite the persistence of inflation below the Fed’s target of 2 percent, measured by the personal consumption expenditures (PCE) price index minus food and energy costs.

The Fed sought to keep price increases in line with that mark by steadily raising rates, but the core PCE index rose just 1.5 percent in the 12 months since April 2018.

With inflation far below the Fed’s target for a healthy economy, critics, in particular Trump, have called on the bank to cut rates and boost growth while price increases remain stable.

The president said in an interview last week that he’s waited “long enough” for the Fed to cut interest rates and accused Powell of holding back the economy.

“I disagree with him entirely,” Trump said of Powell, claiming that the economy and the stock market would have grown faster “if we had a different person in the Federal Reserve that wouldn’t have raised interest rates so much.”

Trump has ripped Powell in the press and on Twitter for nearly a year, shattering decades of relative silence from the White House on monetary policy. While several of his predecessors have privately pressured past Fed chiefs to loosen rates, Trump’s public criticism of his hand-picked chairman has little, if any precedent.

The political pressure on Powell only intensified this week after Bloomberg News reported Tuesday that Trump had looked into whether he could demote Powell from the Fed chairmanship in February, two months after the president considered firing him.

When asked Tuesday if he would try to demote Powell, the president responded, “Let’s see what he does.”

Even so, Powell appears to be safe from Trump’s ax under the law that established the Fed as an independent agency of the executive branch. The Federal Reserve Act allows the president to fire Fed governors only “for cause,” which is generally considered to mean severe misconduct or neglect of duty, not policy differences.

If Trump tried to fire Powell, it would launch a long-shot legal fight to unseat the Fed chairman that would likely spur chaos in financial markets. It’s also unclear if Trump could legally demote Powell or if doing so would have any practical effect.

Powell has largely brushed off Trump’s attacks while stressing the Fed’s refusal to consider politics in its policymaking decisions. The chairman has also said that he cannot be fired by Trump and would not resign if asked to do so by the president. 

“I think the law is clear that I have a four-year term and I intend to serve it,” Powell said Wednesday.

Updated at 3:09 p.m.