Why the Federal Reserve may not be done cutting interest rates

Don’t count out another interest rate cut from the Federal Reserve just yet. On Wednesday, U.S. central bankers voted unanimously to leave interest rates unchanged and signaled they would stay on hold through 2020.

“Our economic outlook remains a favorable one despite global developments and ongoing risks,” Fed Chair Jerome Powell said during a press conference in Washington. “As long as incoming information about the economy remains broadly consistent with this outlook, the current stance of monetary policy likely will remain appropriate.”

Sarah House, senior economist at Wells Fargo, tells Yahoo Finance’s “The First Trade” that the trade war with China could change the Fed’s best-laid plans.

“We’re not ready to say that the Fed’s going to be on hold from here on out. We still have a rate cut in our forecast in the first quarter, likely March,” says House.

Federal Reserve Chair Jerome Powell gestures while speaking during a news conference after the Federal Open Market Committee meeting, Dec. 11, 2019, in Washington. (AP Photo/Jacquelyn Martin)

“We haven’t seen resolution to the trade issues that have underlined the uncertainty we’ve been seeing and the resulting pressure on business investment. I think until we see a meaningful Phase One deal, particularly those Dec. 15 tariffs canceled or delayed, I think we could still see an easing of rates,” she says.

House says the Fed has successfully been able to pivot from its easing cycle over the summer to its recent stand-pat policy. 

Alex Dryden, global market strategist at JPMorgan Asset Management, says an escalation in trade tensions between the U.S and China or Europe in the new year may be enough to move the the Federal Reserve to action.

“They’re quite flexible – this particular Fed – when it comes to moving with the economic news and data flow, so therefore, if you were to see trade escalation, I think a rate cut could come back onto the table,” Dryden says.

Matt Forester, chief investment officer at BNY Mellon's Lockwood Advisors, senses trade fatigue from the central bankers.

“The Fed would love to stay apolitical,” he tells Yahoo Finance, “and I think they’re a little tired of trying to respond to tariffs. They’d love to be on hold through the next election. We’ll see if they can maintain that stance, given the news.”

Alexis Christoforous is co-anchor of Yahoo Finance’s “The First Trade.” Follow her on Twitter @AlexisTVNews.

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