A top Federal Reserve official said Monday that the central bank may be forced to cut interest rates this year if economic growth slows and inflation remains low.
James Bullard, president of the Federal Reserve Bank of St. Louis, said in a Monday speech that “a downward policy rate adjustment may be warranted soon.”
{mosads}He said the Fed faces several challenges, including “an economy that is expected to grow more slowly going forward, with some risk that the slowdown could be sharper than expected due to ongoing global trade regime uncertainty.”
President Trump has ramped up a trade fight with China and is vowing to impose tariffs on exports from Mexico starting next week.
“In addition, both inflation and inflation expectations remain below target, and signals from the Treasury yield curve seem to suggest that the current policy rate setting is inappropriately high,” Bullard said.
Bullard is the first reserve bank president to say that a rate cut might be necessary this year. Fed watchers and investors have increased the odds of rate reduction as trade tensions and stock market volatility cloud the economic picture.
The economy is expected to grow at a slower rate in 2019 than it did in 2018, when U.S. gross domestic product increased 2.9 percent over the year. Rising trade tensions between the U.S. and several crucial partners, including China, Mexico and the European Union, may also weigh down the economy.
The Fed is also concerned that inflation has lingered below its 2 percent target range as measured by the personal consumption expenditures (PCE) index minus food and energy prices.
The central bank considers a 2 percent annual rate of average price increases to be optimal for a healthy, expanding economy. But the core PCE index for the year since April 2018 showed a 1.6 percent rate of inflation.
The Fed has raised interest rates nine times since 2015 and seven times since President Trump took office in 2017 in a bid to prevent rampant inflation. Trump has been fiercely critical of the Fed’s interest rate policies and has called on the bank to cut rates throughout 2019.
Federal Reserve Chairman Jerome Powell said in May that the bank would likely be “patient” and keep the benchmark interest rate unchanged barring a major shift in the economy.