Former US Treasury Secretary Yellen says one Fed rate cut possible this year

Former U.S. Treasury Secretary Janet Yellen sees one interest rate cut by the Federal Reserve as possible this year, even as the Iran war creates supply shocks in the global economy that put pressure on inflation.

"Short-term inflation expectations are up slightly, but they're going to watch all of that very carefully, and I think they have an open mind," Yellen said on Wednesday at the HSBC Global Investment Summit in Hong Kong.

"If I had to write one thing down on a piece of paper, if I'm going into the next FOMC meeting where the forecasts are produced, I suppose my guess would be that maybe there would be a cut later in the year."

Fed policymakers in March opted to keep benchmark interest rates steady in their current 3.50 percent to 3.75 percent range, and a majority projected at least one rate cut would likely be appropriate this year.

President Donald Trump has repeatedly criticised Fed Chair Jerome Powell for not undertaking the steep rate cuts Trump feels the U.S. economy requires, and has said he believes that his nominee to replace Powell, Kevin Warsh, will deliver them.

Yellen said the Middle East conflict had intensified economic uncertainty.

"It puts upward pressure on inflation and we've already seen that in recent inflation reports, but we're likely to see more," she said. "This is really a broad supply shock."

The six-week Iran war has resulted in financial market upheaval as investors weigh the potential impact on inflation and interest rates in major economies around the world. The conflict has sent crude oil prices surging more than 30 percent.

U.S. consumer prices increased by the most in nearly four years in March amid a record surge in the cost of gasoline and diesel.

Traders have now priced out any wagers on a Fed rate cut this year, compared with bets for roughly two cuts at the start of this year.

Fed Under Pressure

Regarding the White House's sustained political pressure on the central bank, Yellen said Trump has "looked for every possible route that he could take" to "get his way with the Fed."

Prosecutors from U.S. Attorney Jeanine Pirro's office made a surprise visit on Tuesday to the Fed headquarters renovation project, which Trump has said is over budget.

Trump has waged an aggressive campaign against top Fed officials - including Powell, whose term ends in May - with the goal of lowering interest rates. The campaign has sparked political outcry and court challenges.

"I have never seen a threat of this level to the Fed before," said Yellen, who chaired the central bank from 2014 to 2018.

Meanwhile, Yellen said the U.S. and China have a deep trade and investment relationship that is beneficial to both sides.

"It's something we should want to preserve, should value, and the lion's share of it is, frankly, very uncontroversial, and so we want to make sure that we preserve that relationship and see it thrive," she said.

"In other words, I don't want to see a decoupling of the United States with China."

Reuters