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Powell says Fed has 'no recent precedents' for responding to trade uncertainty

There are "no recent precedents" for how the Federal Reserve should respond to escalating trade tensions, but the central bank is ready to take action to ensure the U.S. expansion continues, Fed Chairman Jerome Powell said Aug. 23.

Uncertainty over trade policy "seems to be playing a role in the global slowdown" and dampening manufacturing activity and business investment, Powell said in a speech at the Kansas City Fed's annual Jackson Hole conference in Wyoming.

The Fed is "carefully watching" those developments as it considers its next move on interest rates, Powell said, though he declined to provide specific guidance on whether the Fed will ease rates again next month. Markets expect another rate cut at the Federal Open Market Committee's Sept. 17-18 meeting.

Nothing in Powell's speech "suggests the Fed will pause in September," Ian Shepherdson, chief economist at Pantheon Macroeconomics, wrote in a note to clients.

Powell spoke shortly after China announced it would retaliate against planned tariffs from the U.S., targeting $75 billion of U.S. imports with tariffs of 5% to 10%. The Fed chief did not specifically address that news but noted that the three weeks since the Fed's July 31 rate cut "have been eventful."

A day after the Fed cut interest rates, President Donald Trump announced he would impose 10% tariffs on $300 billion worth of Chinese imports. Other recent developments include further evidence of slower growth in China and Germany, along with rising geopolitical risks stemming from the possibility of a hard Brexit and protests in Hong Kong.

"Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective," Powell said.

Trump was underwhelmed by Powell's speech, tweeting that "as usual, the Fed did NOTHING!"

"My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?" Trump tweeted.

The president later tweeted: "Our great American companies are hereby ordered to immediately start looking for an alternative to China" and that he would respond to China's latest announcement in the afternoon.

Fed officials have been monitoring trade tensions closely but appear divided over their next move, according to the minutes from the July meeting. A few officials at the FOMC have said they would prefer keeping rates flat but are closely monitoring downside risks to their outlooks. That group includes Boston Fed President Eric Rosengren and Kansas City Fed President Esther George, both of whom voted against the Fed's July 31 rate cut.

But despite the more hawkish tone from those officials, they "seem still to be outnumbered" on the FOMC, Pantheon Macroeconomics' Shepherdson wrote.

In an interview with CNBC, St. Louis Fed President James Bullard said he would favor a rate cut partly to ensure the yield curve is out of inversion territory. An inverted yield curve, in which shorter-term Treasury yields are higher than longer-term ones, is "not a good place to be," he told CNBC.