Federal Reserve board chair Jerome Powell. Picture: MANDEL NGAN / AFP
Federal Reserve board chair Jerome Powell. Picture: MANDEL NGAN / AFP

Washington  — The Federal Reserve indicated a readiness to cut interest rates for the first time in more than a decade to sustain a near-record US economic expansion, citing “uncertainties” in their outlook.

While chair Jerome Powell and fellow policymakers left their key rate in a range of 2.25% to 2.5% on Wednesday, they dropped a reference in their statement to being “patient” on borrowing costs and forecast a larger miss of their 2% inflation target in 2019.

While inflation near the goal and a strong labour market are the most likely outcomes, “uncertainties about this outlook have increased,’’ the Federal Open Market Committee (FOMC) said in the statement following a two-day meeting in Washington. “In light of these uncertainties and muted inflation pressures, the committee will closely monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion.”

The FOMC vote was not unanimous, with St  Louis Fed president James Bullard dissenting in favour of a quarter-point rate cut. His vote marked the first dissent of Powell’s tenure as chairman.

Policymakers were starkly divided on the path for policy. Eight of 17 pencilled in a reduction by the end of 2019 as another eight saw no change and one forecast a hike, according to updated quarterly forecasts.

In the statement, officials downgraded their assessment of economic activity to a “moderate” rate from “solid” at their last gathering.

The pivot toward easier monetary policy shows the Fed swinging closer to the view of most investors that President Donald Trump’s trade war is slowing the economy’s momentum and that rates are too restrictive given sluggish inflation.

The change in tone follows attacks on the Fed by Trump for not doing more to bolster the economy and Tuesday’s report by Bloomberg News that the president asked White House lawyers earlier in 2019  to explore his options for demoting Powell from the chairmanship.

That risks casting a political shadow over whatever policy decision the Fed makes, though Powell and his colleagues say they are focusing only on the economic goals Congress gave them.

Officials noted that “growth of household spending appears to have picked up from earlier in the year” and that indicators of business fixed investment “have been soft”. They repeated that the labour market “remains strong”.

Investors have been betting the Fed will reduce rates at its next meeting in late July, though a majority of economists surveyed earlier in June do not  expect a move until December.

Yields on 10-year Treasuries have fallen to the lowest since 2017. The hope of fresh stimulus has sent US stocks to near a record.

Recent US economic data have been mixed. Consumer spending held up in May but job gains were disappointing, and some gauges of business sentiment have cooled on uncertainty around the outlook for trade. The Fed remains bedevilled by inflation continuing to undershoot the central bank’s 2% target despite unemployment being at a 49-year low.

Central bankers are likely hoping for greater clarity over Trump’s trade war with China. Stocks jumped on Tuesday after the president said he would meet Chinese leader Xi Jinping at next week’s Group of 20 summit in Japan.

The Fed, which raised interest rates four times in 2018 and as recently as December projected further hikes in 2019, is not alone in shifting tack.

European Central Bank president Mario Draghi on Tuesday paved the way for a rate cut, and central banks in Australia, India and Russia have lowered borrowing costs in June.

Bloomberg