Fed officials suggest pause on rate cuts could extend further

Traders anticipate US central bank will hold rates steady until September

The Federal Reserve building in Washington. Reuters

Officials at the US Federal Reserve are signalling that their pause on cutting interest rates could be further extended as uncertainty continues to grip the economic outlook.

“Economic policy uncertainty is high, which makes the path of the economy especially difficult to project,” St Louis Fed President Alberto Musalem said in remarks at the Economic Club of Minneapolis on Tuesday.

Last week, the US and China agreed to significantly reduce their respective tariff rates on each other for an initial 90-day period while they negotiate a trade deal, but Mr Musalem said tariffs are still likely to weigh on the economy.

“Even after the de-escalation of May 12, they seem likely to have a significant impact on the near-term economic outlook,” said Mr Musalem, a voting member on the Fed's rate-setting committee.

The Federal Reserve maintained US interest rates at about 4.33 per cent last month owing to economic uncertainty. The authority also warned of rising risks to both its price stability and maximum employment mandates. Fed Chair Jerome Powell told reporters at the time this could force the US central bank to choose between protecting one or the other.

Analysts say that higher interest rates would be one of the clearest indirect effects of tariffs on countries in the Gulf Co-operation Council, many of whose central banks follow the Fed's monetary policy decisions because of the dollar peg.

The Fed has held rates steady since January. Officials have said they want greater clarity on tariffs, fiscal policy and immigration before deciding when to cut rates again.

“It’s not going to be that in June we’re going to understand what’s happening here, or in July,” New York Fed President John Williams said at a conference organised by the Mortgage Bankers Association on Monday.

“It’s going to be a process of collecting data, getting a better picture, and watching things as they develop.”

Mr Williams's timeline was similar to the one given by Atlanta Fed President Raphael Bostic, who told CNBC it could take officials three to six months to determine how tariffs will affect the US economy.

“The economy is in a lot of flux, policy is in flux, there’s a lot of uncertainty,” he said.

Investors currently price in a roughly 5 per cent chance the Fed will cut rates next month, with the next rate cut not happening until September, according to CME Group data.

Bloomberg contributed to this report