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Federal Reserve would cut interest rates to offset trade war damage

Jerome Powell: The 60 Minutes Interview

Wall Street cheered a signal from Federal Reserve Chairman Jerome Powell that the central bank is open to cutting interest rates this year if trade conflicts with China and Mexico slow U.S. economic growth.

Stocks jumped on the news as Powell addressed trade negotiations in remarks at a conference sponsored by the Federal Reserve Bank of Chicago: "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 said. 

Investors took that to mean a rate cut is on the way if the U.S. can't reach a trade deal with Mexico or China. The Dow gained 512 points, closing 2% higher at 25,332. The S&P 500 rose 2.1% and the tech-focused Nasdaq gained 2.6%.

Some Wall Street analysts are now betting that a rate cut could come as soon as the fall. "We expect the Fed to cut in [September]," analysts at Bank of America wrote in a note, predicting a total cut of three-quarters of a percentage point by early next year, adding, "We think things are going to get worse with more pain to the global economy before a deal can be reached with either China or Mexico."

Oxford Economics predicted a rate cut in December, citing "Increased business uncertainty from rising trade tensions vis-à-vis China and Mexico, slower domestic growth momentum and a lingering inflation undershoot." The Fed aims to keep annual inflation at about 2%, but the actual inflation number has persistently missed that target.

Last week President Donald Trump announced that the U.S. would impose tariffs on Mexico, which he blames for the flow of people migrating from Central America to the southern border of the U.S. The tariffs would escalate from 5% starting later this month to 25% by October.

The U.S. also recently raised tariffs on thousands of Chinese imports to 25% from 10% and has threatened similar tariffs on some $300 billion in consumer goods from China that are sold in the U.S.