Federal Reserve officials left interest rates unchanged at their June meeting but opened the door to a cut if President Trump’s trade fight intensified and risks to the American economy increased.
While the Fed still expects a strong labor market and inflation near its goal, “uncertainties about this outlook have increased,” according to the central bank’s post-meeting statement, released Wednesday.
The Fed is worried about weak inflation, slowing global growth and the trade war, and those factors are pushing it closer to a rate cut. But officials suggested they were not yet ready to pull the trigger, wanting to see how events played out.
Fed Chairman Jerome H. Powell, in a news conference after the meeting, referenced Mr. Trump’s trade disputes and softening global growth as issues that could influence the Fed’s decision to shift away from the “patient” stance it adopted earlier this year.
“In the weeks since our last meeting the crosscurrents have re-emerged,” he said, “raising concerns about the strength of the global economy.”
Mr. Powell said the Fed made “significant changes” to its policy statement, which marked down its assessment of overall economic activity to “moderate” instead of “solid” as it did in May.
Since the Fed’s last meeting, in May, Mr. Trump has renewed his trade fight with China, threatened tariffs on Mexico and given Japan and Europe six months to reach a trade agreement with the United States or face auto tariffs. Trade tensions have heightened uncertainty among companies, investors and foreign leaders and may be weighing on business investment.
“News about trade has been an important driver of sentiment,” Mr. Powell said. “We’re also looking at global growth. It’s really trade developments and concerns about global growth that are on our mind.”
The Fed noted in its statement on Wednesday that “indicators of business fixed investment have been soft,” and said that “inflation for items other than food and energy are running below 2 percent,” reflecting downgrades to the language it used to describe investment and inflation after the early May meeting.
Still, Mr. Powell said most officials thought it was too soon to act, given that recent economic developments were fluid and could be resolved in the coming months.
“Some of these developments are so recent that we want to see whether they’re sustained,” he said.
For the first time during his tenure, Mr. Powell did not have a unanimous vote on a decision to hold rates steady. James Bullard, the president of the Federal Reserve Bank of St. Louis, dissented, indicating he wanted to cut rates at this meeting.
And most Fed officials are predicting rate cuts. Officials indicated that they expected to cut rates next year, reducing the median Fed funds rate forecast to 2.1 percent for 2020. It currently stands at 2.25 to 2.5 percent.
“A number of those who wrote down a flat rate path agree” that the case for additional accommodation has “strengthened” since May, Mr. Powell said. “We will use our tools as appropriate to sustain the expansion.”
One of the biggest risks to the expansion has been trade uncertainty, particularly related to China. Talks between China and the United States collapsed last month, prompting Mr. Trump to raise tariffs on $200 billion worth of Chinese goods and threaten to tax nearly all of its imports. China has retaliated on American products.
The two sides had appeared to be at an impasse but on Tuesday, Mr. Trump said he would have an “extended meeting” with Chinese President Xi Jinping at the Group of 20 summit in Japan later this month. That meeting, which could either defuse or escalate the trade fight, will be crucial to the Fed’s decision-making.
The choice to hold rates steady came despite ongoing pressure from Mr. Trump, who on Monday suggested he might demote Mr. Powell if the central bank did not move to easing rates.
When asked about the president’s comments, said: “I think the law is clear that I have a four-year term, and I fully intend to serve it.”
A Fed spokesperson noted that the chairman could be removed only “for cause.”
Investors seemed to find little new information in the Fed’s policy statement at 2 p.m. Shortly after the central bank announced its decision to leave rates unchanged, the S&P 500 was up 0.3 percent. Yields on government bonds — which are closely tied to monetary policy — declined, with the yield on the 10-year Treasury note falling to 2.04 percent.
The Fed hasn’t cut rates since the end of 2008, when the Federal Open Market Committee slashed them to almost zero, an effort to stoke growth in the depths of the recession. Between late 2015 and the end of last year, officials gradually raised their policy interest rate nine times to help keep the strong economy from overheating.
But Mr. Powell indicated early this year that the Fed was pivoting away from steady increases, adopting a patient stance instead as markets wobbled and growth showed signs of weakening. The federal funds rate is now at 2.25 to 2.5 percent, much lower than it has been in the later years of an economic expansion. That leaves the central bank with less room to cut rates come the next recession.
Policymakers see rates returning to 2.4 percent in 2021 and hovering at 2.5 percent in the longer run, based on the median projection. That’s down from a longer-run expectation of 2.8 percent in March, suggesting the Fed would have even less room to cut rates in future recessions than previously thought.
Fed officials are working against a fraught political backdrop. The central bank is independent of the White House and Mr. Trump appointed Mr. Powell as its head, but the president regularly criticizes the central bank for having lifted rates too many times last year. Mr. Trump ramped up those attacks this week, saying that Fed policy was putting the United States on an uneven playing field and hinting that he could consider the unprecedented move of attempting to demote Mr. Powell.
“They’re going to be making an announcement pretty soon, so we’ll see what happens,” Mr. Trump said, when asked by a reporter whether he would try to strip Mr. Powell of his chairmanship. “I want to be given a level playing field, and so far I haven’t been.”
Investors saw a slim chance of a rate cut in June. Before the meeting on Wednesday, they saw an 80 percent chance of a rate cut in July.
The Fed lowered its expectation slightly for long-run sustainable unemployment to 4.2 percent from 4.3 percent in March. Officials also soured on inflation: The median one now sees a less-volatile price gauge closing out the year at 1.8 percent and 1.9 percent in 2020. The Fed had previously expected the gauge to hit its 2 percent target by the end of 2019.
Until today, there had never been a dissent under Mr. Powell’s watch — the last time anyone voted against a decision was in December 2017 under Chairwoman Janet L. Yellen, when the Chicago Fed President Charles Evans and Minneapolis President Neel Kashkari indicated they would have preferred easier policy.
