NEW YORK – America’s grinding trade wars are darkening the economic horizon and could help justify a decrease in interest rates, Federal Reserve Chairman Jerome Powell said Tuesday.
But Powell also insisted the central bank was “insulated” from political pressures despite President Donald Trump’s persistent criticism of the Fed chairman.
Powell’s speech in New York amplified the central bank’s recent message that policymakers are ready to step in to protect the world’s largest economy, which next week will mark its longest expansion on record but is showing increasing signs of strain.
Markets overwhelmingly expect the Fed to cut rates next month as Trump’s trade battles drag on and the global economy slows — both factors that have begun to dent business confidence and investment in the United States.
But Powell was careful to temper this message, warning that the central bank would not “overreact” to individual data points and short-term swings in sentiment that could quickly evaporate.
“The question my colleagues and I are grappling with is whether these uncertainties will continue to weigh on the outlook and thus call for additional policy accommodation,” Powell said in prepared remarks.
Wall Street reacted negatively to Powell’s remarks and to others on Tuesday from James Bullard, president of the Fed’s St. Louis regional branch, who told Bloomberg a cut of 50 basis points would be excessive.
Trump has repeatedly — and publicly — demanded looser monetary policy, even though the Fed is meant to be above the political fray.
The Fed last week held steady on interest rates for the fourth time this year. And with U.S. unemployment near historic lows and inflation forecast to rise only slowly, the outlook remained generally “favorable,” Powell said.
But risks to that outlook have grown, he added, as recent progress on resolving trade disputes had deteriorated, producing greater uncertainty.
Powell said business people have voiced “heightened concern” over trade, which may have hit confidence and could also be turning up in economic data, such as weakening investment by companies.
But he cautioned that current economic warning signs could prove temporary and the U.S. central bank should seek confirmation before taking any policy action.
“It’s important not to overreact in the short term to things which may turn out to be temporary,” he said.
Nevertheless, he said “many” members of the Fed’s rate-setting Federal Open Market Committee believe the case for cutting rates had “strengthened.”
“A lot has changed since December, including estimates of global growth for 2019 have come down substantially,” he said during a Q&A following the speech.
He pointed in particular to the near-collapse of U.S.-China trade talks last month.
“My colleagues and I still see a favorable outlook as the most likely outlook,” he said.
“But we do see that the risks to that outlook have increased. We’re very mindful of those risks and prepared to use our policy tools to support activity as needed.”
In his Bloomberg interview on Tuesday, the St. Louis Fed’s Bullard said he currently favored cutting interest rates by 25 basis points but said going further would be “overdone.”
“I don’t think the situation really calls for that but I would be willing to go 25,” he said.
The remarks dented the benchmark Dow Jones Industrial Average, which was trading down 0.6 percent toward 1500 GMT.