Powell, Eyeing Trade War, Says Fed Will Act to Sustain Expansion

CHICAGO — Federal Reserve Chairman Jerome H. Powell said on Tuesday that the central bank is prepared to act to sustain the economic expansion should fallout from President Trump’s trade actions on China and Mexico threaten the United States economy.

“We do not know how or when these issues will be resolved,” Mr. Powell said of trade negotiations between the United States and other nations. “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 percent objective.”

While Mr. Powell did not explicitly say that the Fed will cut interest rates, markets are likely to interpret his comments as a signal that the central bank is prepared to do so in order to offset any economic fallout from Mr. Trump’s ongoing trade wars. Mr. Powell spoke from remarks prepared for delivery at a conference in Chicago.

Markets continue to gyrate amid concerns that Mr. Trump plans to expand his trade war to Mexico and that a deal with China may not be within reach. Financial markets have experienced increasing volatility following Mr. Trump’s announcement that he will place tariffs on Mexico in an effort to push it to address immigration issues.

Paired with an ongoing trade spat with China that escalated last month, the push has economists worried that business confidence — and global growth — could take a hit.

[Wall Street is pinning its hopes on rate cuts.]

In recent days financial markets have priced in a growing certainty that the Fed would cut interest rates over the coming months. Fed funds futures markets are currently putting over 50 percent probability on the Fed cutting rates at its meeting in July, up from less than 20 percent odds in early May.

Mr. Powell’s comments appeared to do little to change the market’s view. Yields on short-term Treasury notes declined slightly, after his comments were released. And stocks, which had been up before the speech was released, climbed a bit more. The S&P 500 was up more than 1 percent shortly before 10:30 a.m.

Analysts have altered their forecasts for Fed policy in recent days and are now predicting as many as three rate cuts as concerns grow that the central bank will need to take drastic action to prop up the economy. JPMorgan and Evercore ISI now project a total of two interest-rate cuts starting in September, and Barclays predicts three cuts. That is up from previous estimates of a single rate cut, at most, for 2019.

In a speech on Monday, the president of the Federal Reserve Bank of St. Louis, James Bullard, said that a cut in interest rates “may be warranted soon” in order to stoke inflation and “provide some insurance in case of a sharper-than-expected slowdown” in growth.

Mr. Powell also focused on longer-run challenges facing the rate-setting Federal Open Market Committee, saying that rates near zero have “become the pre-eminent monetary policy challenge of our time.”

Against that backdrop, the Fed is concerned that inflation has been coming in below its objective for low and stable 2 percent price gains. The shortfall leaves it with even less room to cut interest rates, which include inflation, in a downturn.

“My F.O.M.C. colleagues and I 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,” Mr. Powell said. He said that looking for ways to change the Fed’s policy strategy to strengthen its inflation-targeting credibility is “at the heart of the review.”

The central bank is also reviewing its approach to communication and its tool kit for combating economic downturns, and is expected to reach and report conclusions sometime in early 2020.