Fed Chair Hints at Rate Cut

Federal Reserve Chairman Jerome Powell indicated Tuesday that the U.S. central bank will cut interest rates in the near term if necessary, an announcement that sent stocks sharply higher.

Powell's comments sent the Dow Jones Industrial Average up over 400 points Tuesday, while the S&P/TSX composite index was up 150.35 points to close at 16,166.24 for the second largest gain of the year after one in early January.

Powell’s comments were made at a conference in Chicago and were in response to a question about the ongoing trade war between the U.S. and China. He said, "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."

Powell didn't explicitly say what the Fed would do if it concluded that the U.S. government’s trade conflicts were damaging the economy. But expectations are rising that the Fed will cut rates at least once and possibly twice before year's end, in part because of the consequences of the trade war. The current U.S. economic expansion next month will become the longest period of uninterrupted growth in U.S. history, surpassing the 10-year expansion of the 1990s.

However, President Donald Trump has imposed far-reaching tariffs on imports on China, which has retaliated with tariffs of its own on U.S. exports. He has also threatened to impose an escalating series of tariffs against Mexico unless Mexico stops a flow of migrants from Central America into the U.S.

The Federal Reserve manages interest rates to achieve two goals, maximum employment and low inflation. While unemployment has fallen to a 50-year low of 3.6%, inflation has failed to rise to the Fed's target of 2%. The Fed sees that target as the optimal level for annual price increases and worries if the price gains go too far above two per cent or fall below that level.

The U.S. policy rate at the moment sits in a range of 2.25% to 2.50%, meaning that the Fed has less room to cut rates to stimulate growth.