Federal Reserve Chairman Jerome Powell (Photo Credit : Fed's official Twitter account)

JAKARTA (TheInsiderStories) – The Federal Reserves (Fed) chair Jerome Powell said that the downside risks to the United States (US) economy have escalated recently, reinforcing expectations that the central bank is likely to trim the Fed Fund Rate (FFR) next month.

In a speech on Tuesday (06/25), he also warned that the Fed is unlikely return to raising rates any time soon and could cut them, despite what he described as “solid fundamentals supporting continued growth”.

“When the FOMC [Federal Open Market Committee] met at the start of May, tentative evidence suggested these cross-currents were moderating, and we saw no strong case for adjusting our policy rate,” he opined.

He continued: “Since then, the picture has changed. The cross-currents have re-emerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy.”

Last week, The Fed decided to keep interest rates on hold while striking a dovish tone and warning about “uncertainties” to the economic outlook. Powell repeated that “an ounce of prevention is worth more than a pound of cure” — a hint that the Fed is moving towards embracing the argument for precautionary “insurance” cuts to interest rates.

However, the chances of a bigger-than-usual half-point lowering of rates faded somewhat on yesterday, after James Bullard, the president of the St Louis’ Federal Reserves told media that a rate cut of 50 basis points (bps) at the Board’ next meeting in July “would be overdone”, adding that he would be willing to back a cut of 25 bps.

The lack of enthusiasm for a half-point rate cut from one of the Fed’ biggest doves — and the only one to vote for lower rates at last week’ meeting — led traders to ratchet back bets on a large move at the next meeting in July. The market-implied odds on a 50 bps cut fell from 40 percent earlier on Tuesday to 27 percent.

The US central bank’s dovish shift comes amid strident and sustained attacks on its actions from President Donald Trump, who has pushed publicly for the Fed to reduce rates since last year.

Trump renewed his criticism of the central bank on Monday, tweeting: “Despite a Federal Reserve that doesn’t know what it is doing — raised rates far too fast (very low inflation, other parts of world slowing, lowering & easing) & did large scale tightening, $50 Billion/month, we are on course to have one of the best Months of June in US history.”

The president added: “Think of what it could have been if the Fed had gotten it right. Thousands of points higher on the Dow, and GDP in the 4’s or even 5’s. Now they stick, like a stubborn child, when we need rates cuts, & easing, to make up for what other countries are doing against us. Blew it!”

Powell insisted he would not be swayed by such short-term political pressures. He said on Tuesday: “The Fed is insulated from short-term political pressures — what is often referred to as our ‘independence’. Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests.”

Some of those policymakers did in fact advocate for a rate cut at last week’s meeting, including Bullard and the Minneapolis Fed’ Neel Kashkari. They were driven by concern that inflation is stuck below the central bank’ 2 percent target — suggesting that there is room to stimulate the economy, helping to create more jobs and boost wages, without pushing prices too high.

The US economy is slowing after a stronger than expected first quarter. Sales of new US homes fell to a five-month low in May while consumer confidence dropped in June to its lowest level since September 2017, according to reports on Tuesday.

“The limited available evidence we have suggests that investment by businesses has slowed from the pace earlier in the year,” Powell said.

The Fed chairman said the economic outlook basically remained promising, with unemployment near historic lows. However, the risks to this favorable baseline outlook appear to have grown, he ended.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com