WASHINGTON (REUTERS) - The US Federal Reserve on Wednesday (June 19) signalled it could cut interest rates by as much as half a percentage point over the remainder of this year in response to increased economic uncertainty and a drop in expected inflation.
The Fed, which held rates steady after the end of its latest two-day policy meeting, dropped a promise to be "patient" in adjusting rates and said it "will act as appropriate to sustain" a nearly 10-year economic expansion.
Nearly half of the US central bank's 17 policymakers now show a willingness to lower borrowing costs over the next six months, and Fed chairman Jerome Powell said that even those who do not see a rate cut as the likeliest outcome "agree the case for additional accommodation had strengthened" since the last policy meeting in May.
Though the baseline outlook remains "favourable," Powell said, risks continue to rise, including the drag that rising trade tensions may have on US business investment and signs that economic growth is slowing overseas.
"Ultimately, the question we are going to be asking ourselves is, 'are these risks going to be continuing to weigh on the outlook?'" Powell said, in a press conference after the release of the Fed's policy statement and fresh economic projections.
"We will act as needed, including promptly if that's appropriate, and use our tools to sustain the expansion," he said, adding that if the Fed does ease monetary policy by cutting interest rates, it may also halt a gradual slimming of its massive balance sheet.
Interest-rate futures surged in response to the dovish remarks, and traders are now betting heavily on three rate hikes by the end of the year. US stocks turned higher, with the benchmark S&P 500 up about 0.4 per cent from the previous day's close.
In the Treasury market, expectations that the Fed would be cutting rates before long drove the yield on two-year notes , often a proxy for Fed policy, to the lowest in a year and a half at around 1.75 per cent.
The gap between those and the yields on 10-year notes widened by the most in 16 months.
The new economic projections showed policymakers' views of growth and unemployment were largely unchanged from March. But they now project headline inflation to be just 1.5 per cent for the year, down from the previous projection of 1.8 per cent.
They also expect to miss their 2 per cent inflation target next year as well, a blow for a central bank that has missed that goal for years.
Policymakers "expressed concerns" about the pace of inflation's return to 2 per cent, Powell said, omitting his characterisation after the Fed's last meeting of low inflation as "transient."
Wages are rising, he said, "but not at a pace that would provide much upward impetus" to inflation.
Seven of 17 policymakers said they expected it would be appropriate to cut rates by half a percentage point by the end of 2019, and an eighth saw a rate cut of a quarter point as appropriate.
That was not enough to change the median outlook for the Fed's targeted overnight lending rate, which officials projected to remain in a range of between 2.25 per cent and 2.5 per cent for the rest of this year.
But it still represented a significant shifting of views on the Fed.
Only one policymaker continues to see a rate hike as likely in 2019.
The long-run federal funds rate, a barometer for the state of the economy over the long term, was cut to 2.5 per cent from 2.8 per cent.
St Louis Fed President James Bullard, who had argued that rates should be cut, dissented in Wednesday's policy decision.