Fed opens door to rate cut amid growing 'uncertainties'

Daniel Fowler
June 20, 2019

The Federal Reserve chairman, Jerome Powell, has responded to reports that Donald Trump is seeking to fire or demote him.

The more dovish Fed tone weighed on the dollar, which had been boosted in the prior session by Draghi's statement that the European Central Bank could cut interest rates if the economy slows much more.

Bullard last month was to first central banker to give voice to the expectations of financial markets that economic conditions would require the Fed to cut in the near future.

Wall Street closed higher on Wednesday: The Dow Jones Industrial Average gained 0.2 per cent to 26,504, the S&P 500 added 0.3 per cent to close at 2926 and the Nasdaq closed 0.4 per cent higher at 7987. Ahead of the statement, stocks had been fractionally lower on the day.

The gap between those and the yields on 10-year notes widened by the most in 16 months.

The central bank left its federal funds rate unchanged at 2.5pc and said that "uncertainties" over the outlook had increased as trade tensions escalate.

Near 2100 GMT, the euro was still positive against the dollar, but not as much as it had been shortly after the Fed announcement.

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Though the baseline outlook remains "favourable", Powell said, risks continue to rise, including the drag that rising trade tensions may have on U.S. business investment and signs that economic growth is slowing overseas.

The central bank forecasts economic growth of 2.1% this year, which would be a significant drop from 2.9% in 2018.

Those actions caused Fed officials to change their tone from largely dismissing the macroeconomic fallout of Trump's trade policies to worrying that persistent new tariffs and shifting global supply chains could be emerging.

Asked Wednesday what he would do if the president called for his ouster, Powell replied: "I think the law is clear that I have a full four-year term and I intend to serve it".

Trump has publicly berated Powell and the Fed and explicitly called on the central bank to cut rates, an unprecedented move that challenges the Fed's supposed independence from political interference.

The Fed should not be under the president's influence in setting monetary policy, US Congress House of Representatives Speaker Nancy Pelosi said on Wednesday.

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