CHICAGO: The US central bank is "closely monitoring" trade disputes and the implications for the economy, Federal Reserve Chairman Jerome Powell said on Tuesday (Jun 4).
A day after another Fed official said an interest rate cut could be needed "soon" to preserve economic growth, Powell said the central bank "will act as appropriate to sustain the expansion."
Some analysts saw Powell's comment as opening the door to lowering the benchmark interest rate, which the central bank had not entertained until now.
President Donald Trump's multi-front trade wars, including the exchange of punishing tariffs with China and new threats to hit Mexico with fresh import duties, have undercut business confidence and raised prices for manufacturers.
And many forecasters - including the International Monetary Fund - have sounded warnings about the trade disputes, calling them the main risk to the outlook and predicting the US and global economies will slow.
An increasing number of economists predict the Fed will have to act to stimulate growth as early as this year.
After four increases in the benchmark lending rate last year, Powell and his Fed colleagues have this year repeatedly said they can remain patient while they gauge how the economy progresses.
But in a speech on Monday, St Louis Federal Reserve Bank President James Bullard said a rate cut "may be warranted soon" given uncertainty about trade conflicts and inflation well below the Fed's two per cent target.
Powell just last month said he was "comfortable" with interest rates and the economic outlook, but at a conference on improving Fed communications, he acknowledged that the Fed is prepared to move if necessary.
OPENING THE DOOR
On the trade front, he said in the prepared remarks, "We do not know how or when these issues will be resolved."
"We are closely monitoring the implications of these developments for the US economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric two per cent objective."
Chris Low of FTN Financial said a rate cut will become necessary as the global slowdown comes to US shores.
"The door is now open to a rate cut discussion at the June meeting in two weeks. We'll see if anyone other than Jay Bullard is willing to step up and cut," Low said in a commentary on the Powell speech.
"Global manufacturing is in recession," he said. "This year's weakness has momentum."
Powell's second in command, Richard Clarida, told CNBC that tariffs so far have had only a small effect on the economy but that could worsen if more tariffs and retaliation are imposed.
While he declined to predict a rate cut, he said "if we get a sense that the outlook is slower - growth is slower than we expect, and if we get the sense that underlying inflation is below where we want to be ... we're going to put in place appropriate policy to achieve those goals."
Other economists caution that trade conflict, especially if the blanket tariffs in Mexico take effect on Jun 10, will tend to push inflation higher, making the Fed's job all the more difficult.
However, the Fed's inflation goal has proved elusive and Powell said the Fed is looking for ways "to strengthen the credibility of our symmetric two per cent inflation objective."
With inflation remaining stubbornly below the target - it was 1.5 per cent in April - Powell said Fed officials "must - and do - take seriously the risk that inflation shortfalls that persist even in a robust economy could precipitate a difficult-to-arrest downward drift in inflation expectations."