Top Federal Reserve policymakers might cut interset rates if trade tensions continue to get worse.
Fed Chair Jerome Powell and his No. 2, Richard Clarida are watching disputes between the US and its trading partners. The next meeting of the Federal Open Market Committee takes place June 18-19, with Clarida noting that the Fed “can’t be handcuffed” by market pricing.
“I’m a little nervous about the low inflation rate,” Chicago Fed President Charles Evans said in an interview with Bloomberg Television’s Michael McKee. “That by itself could be a reason for a little more accommodation.”
In a separate interview on BTV Wednesday, Dallas Fed chief Robert Kaplan said he’d want to to see more evidence the economy is slowing before backing a rate cut. Kaplan doesn’t vote on policy this year.
“It’s early to make a judgment on that,” Dallas Fed chief Robert Kaplan. “We’re going to be very vigilant in understanding these heightened trade tensions. See if they feed through to the economy. Most importantly, see if they persist.”
At a Fed conference in Chicago Tuesday, Powell evoked “trade negotiations and other matters.”
He assured: “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.”
Clarida told CNBC the Fed is watching economic indicators.
“As we said in May, we think policy was in a good place then and we’re going to let the data flow in to indicate if we need to make any adjustments,” Clarida said. “Whether or not that means acting preemptively or when the data comes in is just going to depend on the context at the time.”
The Labor Department will release its May jobs report on Friday. “The Fed is being just as patient about lowering rates as it was about raising rates,’’ said Mark Vitner, a senior economist at Wells Fargo & Co. in Charlotte, North Carolina. “While the markets have reacted so viscerally to the ratcheting up in the trade rhetoric, the Fed needs some time to see how it will play out.’’
Meanwhile, gold hit a three-month peak on Tuesday. The rally comes at the same time as an increase in the U.S. dollar index.
“Really, the sole bear case on gold is a stronger dollar, and if they both rally together, well, then there’s no bear case anymore,” said Bleakley Advisory Group’s Peter Boockvar. “And if the dollar actually falls, well, then gold can really get its legs.”