The US Federal Reserve is inching toward a cut in interest rate as Trump’s trade war with China tests financial markets’ patience

The Federal Reserve’s top policymakers aren’t yet ready to cut interest rates, but worsening trade tensions are nudging them in that direction.

In separate comments Tuesday, Fed Chair Jerome Powell and his No. 2, Richard Clarida, reassured nervous investors they’re watching closely for signs that disputes between the US and its trading partners are denting the outlook for the world’s largest economy. Their remarks moved the Fed slightly closer to its first rate cut since 2008.

“Powell may have opened the door a crack wider to the possibility that the Federal Reserve will ratify one or two of the rate cuts the markets have discounted this year,’’ said Chris Rupkey, chief financial economist at MUFG Union Bank.

Other Fed watchers said Powell and Clarida fell short of signalling a move at the June 18-19 gathering of the Federal Open Market Committee. Clarida declared the Fed “can’t be handcuffed” by market pricing that can be volatile.

Nonetheless, their acknowledgement of risks posed by the deepening trade spats lent comfort to investors, who have aggressively increased bets the central bank will ease this year. The S&P 500 Index of US stocks jumped 2.1 per cent, the most since January, while the yield on 10-year US Treasuries rose from Monday’s 20-month low.

“Powell is essentially telling the markets that the Fed is alert to what’s happening,’’ said Roberto Perli, a partner at Cornerstone Macro in Washington and former Fed economist. “But at the same time it’s too soon to judge the impact on the US outlook because, as he says, nobody can know how the situation will evolve. So he seems to be buying time.’’