The Fed May Give Trump His Rate Cut. The Question Is When.

By Jeanna Smialek

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After the Federal Reserve’s June meeting, the chairman, Jerome H. Powell, said interest rates would remain unchanged. But he expressed concerns over slowing global growth, suggesting that the Fed was prepared to make cuts.CreditCreditKiichiro Sato/Associated Press

WASHINGTON — President Trump might get what he wants from the Federal Reserve, which kept interest rates steady on Wednesday but indicated that it could soon cut them as economic risks mounted and inflation remained stuck below target.

A growing number of officials on the Fed’s policymaking committee expect to lower rates before the end of the year amid continuing trade tensions and slowing global economic growth. The Fed chair, Jerome H. Powell, said at a news conference after the Fed’s two-day meeting that officials were watching economic developments to gauge whether and when action was warranted.

“The committee felt that the right thing to do was to wait and see more — and we will see a lot more on all of these issues in the very near term,” Mr. Powell said. He added that emerging risks “have caused a number of us to write down rate cuts, and a number of those who haven’t to say that the case has strengthened.”

Mr. Trump has been jawboning the Fed to cut rates and stop shrinking the large portfolio of government bonds the central bank amassed in the wake of the financial crisis as it tried to shore up the American economy. While the Fed operates independently of the White House and strives to ignore political chatter while making rate decisions, rising economic threats — some of them caused by the trade fights Mr. Trump is waging — have forced it to open the door to a cut.

Many Wall Street economists said crossing the threshold was now merely a matter of timing.

“They’re clearly turning toward a more dovish direction,” said Roberto Perli, an economist at Cornerstone Macro in Washington. “The assumption is that they will cut. The question is how much, and when?”

After the interest rate announcement, the S&P 500 finished the day up 0.3 percent. Defensive sectors such as health care and utility stocks, businesses that hold up well during periods of weak economic growth, led the market’s gains.

Seven Fed officials have penciled in a decrease of 0.5 percentage points by the end of the year, while one official expects a 0.25-point move, based on the Fed’s summary of economic projections. The president of the Federal Reserve Bank of St. Louis, James Bullard, dissented from the Fed’s decision to leave policy unchanged this month, arguing to start cutting. It was the first “no” vote during Mr. Powell’s 16-month tenure.

The decision to lean toward a rate cut is a significant shift for the central bank, which raised rates four times last year and adopted a “patient” stance this year. But officials have been growing nervous about the global economic outlook.

Since the Fed’s May 1 meeting, at which it also left rates unchanged, Mr. Trump has renewed his trade fight with China, threatened tariffs on Mexico and given Japan and Europe six months to reach a trade agreement with the United States or face auto tariffs. Trade tensions have heightened uncertainty among companies, investors and foreign leaders, and it may be weighing on business investment. While consumer spending remains robust, factory production is slowing and job growth has shown early signs of moderating.

Inflation has been stuck below the Fed’s 2 percent goal, which it targets to guard against economy-harming deflation, since the central bank formally adopted it in 2012. Now market expectations for inflation are sinking and the consumer outlook is wavering, increasing the risk that price gains get stuck at a permanently low level.

Against that backdrop, the Fed marked down its assessment of overall economic activity to “moderate” from “solid” in May.

“News about trade has been an important driver of sentiment,” Mr. Powell said. “We’re also looking at global growth. It’s really trade developments and concerns about global growth that are on our mind.”

Markets will now fixate on trade negotiations between the United States and China, which could be a key determinant of the economic outlook and, as a result, Fed policy. Talks between the world’s two largest economies collapsed last month, prompting Mr. Trump to raise tariffs on $200 billion worth of Chinese goods and threaten to tax nearly all of its imports. China retaliated with its own tariffs on American products.

The two sides had appeared to be at an impasse, but Mr. Trump said Tuesday that he would have an “extended meeting” with President Xi Jinping of China at the Group of 20 summit in Japan this month. The face-to-face could either defuse or escalate the trade fight. Mr. Trump has said he will make a decision about the next round of tariffs after the two leaders meet.

Though there are economic reasons for the Fed’s greater caution, it carries a political risk: The Fed might appear to be bending to the president’s will. Mr. Trump has been blaming it for creating an unfair playing field for the United States and on Tuesday suggested that he might try to demote Mr. Powell if the central bank did not move toward easing rates.

That would be an unprecedented step, and the White House probably lacks the legal authority to make such a move. The Fed chair is a Senate-confirmed position, and the Fed is an independent agency.

“I think the law is clear that I have a four-year term, and I fully intend to serve it,” Mr. Powell said when asked about the president’s comments.

This is the Fed’s second major policy pivot in six months. Between late 2015 and the end of last year, officials gradually raised their policy interest rate nine times to help keep the strong economy from overheating. Mr. Powell indicated early this year that the Fed was moving away from steady increases, adopting a patient stance instead as markets wobbled and growth showed signs of weakening.

That patience has given way, and the Fed is poised for its first cut since 2008, when the economy was in the depths of the Great Recession.

“The bar now is low for a rate cut,” economists at UBS wrote in a note after the meeting. They had been expecting the Fed to keep rates on hold until at least later this year, but now project a 0.5-point move when the Fed meets next month.

The federal funds rate is now at 2.25 to 2.5 percent, much lower than it has historically been in the later years of an economic expansion. That leaves the central bank with less room to cut rates come the next recession, which could place a premium on acting decisively and early to fend off any slowdown.

Officials clearly see their next move as an effort to avert economic softening, rather the start of a rate-cutting cycle that takes the policy setting back toward near zero. Eight of 17 Fed policymakers see rates falling by the end of 2019, and nine expect a lower setting by the end of 2020. Not a single official projects rates that are more than 0.5 points below their current setting, meaning they expect that the cuts will be minimal.

A rate cut before September could bring about a quicker end to the Fed’s plan to stop shrinking its large portfolio of bonds. Fed officials have said they wouldn’t want their process of reducing their holdings to work at cross-purposes with interest rates: While lowering borrowing costs should stimulate growth, reducing the balance sheet could curb it, at the margin.

“If we do provide more accommodation, we’ll certainly keep in mind what we said earlier this year, which is that we’ll always be willing to adjust balance sheet policy so that it serves our dual mandate objectives,” Mr. Powell said Wednesday. The post-meeting statement didn’t talk about balance sheet timing, and Mr. Powell said the full committee really hadn’t addressed it.

Besides the short-term risks to the outlook, Mr. Powell and his colleagues lowered their expectations for a less-volatile inflation gauge in the economic projections released at this meeting — they now see themselves missing their 2 percent price goal until 2021. Some are worried about the slower pace of progress, Mr. Powell said.

While wages are rising, it’s “not at a pace that would provide much upward impetus to inflation,” he noted in his statement. “Moreover, weaker global growth may continue to hold inflation down around the world.”

A version of this article appears in print on , on Page B1 of the New York edition with the headline: Fed Punts But Signals Skittishness. Order Reprints | Today’s Paper | Subscribe