Federal Reserve Chairman Jerome Powell signaled an openness to cut interest rates if necessary, pledging to keep a close watch on fallout from a deepening set of disputes between the U.S. and its largest trading partners.
Referring to "trade negotiations and other matters," Powell said Tuesday in Chicago that "we do not know how or when these issues will be resolved."
"We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2% objective," Powell told a conference at the Chicago Fed.
His message was reinforced by Vice Chair Richard Clarida, who later told CNBC that the Fed would "put in place policies that not only achieve but sustain price stability and maximum employment, and we'll do that if we need to." He also said the Fed can't be "handcuffed" to financial-market moves and suggested it was too early to take a strong signal of concern from the inverted yield curve, though he would take it seriously if the situation persisted.
Investors have aggressively increased bets the Fed will cut interest rates this year after President Donald Trump widened ongoing trade tensions when he threatened last week to slap new tariffs on Mexico unless it stemmed migrant flows to the U.S.
U.S. stocks surged following Powell's remarks, with the S&P 500 on track for its best gain since January. Treasuries initially pared losses before declining further, pushing up the 10-year yield to 2.13%, while the dollar was lower.
"Powell is walking a tightrope — wants to stay optimistic with still solid growth, but willing to cut if need be,'' said Diane Swonk, chief economist at Grant Thornton in Chicago. "The threshold on a rate cut is falling."
While investors have made clear they expect as much as half a percentage point of rate cuts from the Fed this year, Powell and his colleagues have also come under pressure from the president to ease borrowing costs to help boost the U.S. economy. Powell has been careful not to respond to Trump's barbs, promising to set policy as the economy dictates.
Powell's speech was dedicated mostly to the Fed's yearlong review of its monetary policy strategies, tools and communication practices. The review was triggered largely by longer-term worries over the Fed's struggle to keep inflation close to its 2% target.
