A drop in the consumer outlook for inflation and intensifying trade tensions drew caution from Federal Reserve officials as policymakers faced fresh market volatility and a renewed set of risks.
While Fed officials have largely discounted the trade war so far as unlikely to derail the USA economic expansion, officials emphasized Monday that a protracted tit-for-tat battle between the United States and China was a different matter that might require a Fed response.
The Federal Reserve is sure to keep interest rates on hold Wednesday - and for the near future - for not cutting prices, as President Donald Trump maintains up his attacks over the Fed.
However stocks and bonds reversed course and turned off mixed after Fed Chairman Jerome Powell declined to state whether some investors are in expecting the central bank this season to trim interest rates, misguided, some traders have been gambling will happen before year's end.
If the Federal Reserve's optimistic take on inflation had traders second-guessing their bets on an interest-rate cut this year, they're taking matters back into their own hands now.
After the collapse of U.S. -China talks last week and the threat of tariffs ratcheting ever higher, there was more reason to believe the tensions will last a while.
Uncertainty caused by the escalating trade dispute has been one cloud on the horizon, with USA stocks slumping sharply Monday after China retaliated against import levies that the US imposed last week, even as Trump threatened to do more.
Federal Reserve Chairman Jerome Powell avoided commenting on some contentious views given by President Trump's choice for the Fed's Board of Governors.
George said she supports the Fed's current "wait-and-see" approach because of the lack of upward inflationary pressures.
As the trade war intensified over the last few days, however, traders in the federal funds futures market have moved decisively in favor of expecting a Fed rate cut in coming months. Data from the CME Group now sees the Fed cutting rates in October, with a near 10 percentage point shift since Friday in the probability of a rate reduction at that Fed meeting.
The Fed made its benchmark rate - that influences several consumer and business loans - in a selection of 2.25% to 2.5%.
US inflation has cooled over the past year and is now below the Fed's 2 percent target.
Monetary policymakers around the world should review their strategies to prepare for a future of slow economic growth and low interest rates, US Federal Reserve (Fed) Bank of NY president John Williams (picture) said.
The almost quarter point drop was the third-largest since the survey was launched in mid-2013. Three years from now, expectations are for 2.7 percent, down from 2.9 percent.
The risk of a broader or more protracted trade battle could push the market back to the darker days of the fourth quarter a year ago, when trade tension helped drive the S&P 500 Index toward its weakest levels of 2018, she said. "Absent such changes, central banks will be severely challenged to achieve stable economies and well-anchored inflation expectations".
Both bonds and stocks rallied after the Fed released its policy statement, which noted as the economy continues to stay healthy, the inflation remained unusually reduced.