Fed's Powell, in dovish pivot, is prepared to respond if trade war escalates

Federal Reserve Chairman Jerome Powell said on Tuesday the U.S. central bank is watching how global trade developments are impacting the U.S. economic outlook and is prepared to act as necessary to sustain the near-record expansion.

"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 percent objective," he said in a speech.

Powell’s comments ahead of the "Conference on Monetary Strategy, Tools and Communications Practices" come in the midst of increased calls for interest rate cuts by the Fed. 

The CME’s FedWatch Tool, which analyzes the probability of rate moves for upcoming Fed meetings, is currently predicting a 55.9 percent chance of a rate cut in July, with 49.7 percent of traders anticipating the benchmark federal funds rate will be moved into the 2 percent to 2.25 percent range. Only 13.6 percent of traders think interest rates will remain at the current range of 2.25 percent to 2.5 percent by September.

In his speech, Powell stressed that policymakers would respond if inflation remains persistently low, although he did not specify what actions the Fed would take. Core inflation currently remains below the Fed's 2 percent target, although it ticked up slightly in April. 

"In this setting, a similar low-side surprise, if it were to persist, would bring us uncomfortably closer to the ELB," he said, referring to the effective lower bound for interest rates. "My FOMC 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."

Despite the more-dovish pivot, however, Powell avoided any other specific issues relating to the current economic condition.

The Fed has not cut interest rates since 2008 when it lowered the interbank lending rate to 0.25 percent -- essentially zero -- in the aftermath of the financial crisis. Interest rates remained at that level until 2015, when the central bank began tightening once again. The Fed has hiked rates nine times since 2015, including four times last year. 

During the last Federal Open Market Committee meeting, Powell told reporters that policymakers did not see a strong case for moving in either direction. 

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"We do think our policy stance is appropriate right now," he said at the time.