Here comes the Fed...

The central bank has signaled it could slash interest rates if trade conditions worsen.
The Federal Open Market Committee last increased its benchmark interest rate in December, bringing it to a target range of between 2.25% and 2.5%.
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The Federal Reserve is expected to leave borrowing costs unchanged at the end of a two-day policy meeting Wednesday, defying pressure from the Trump administration as its growing trade disputes add to concerns about a cooling economy.

The central bank last increased its benchmark interest rate in December, bringing it to a target range of between 2.25% and 2.5%. Officials have since dimmed the outlook for the economy, also signaling that a three-year hiking campaign could be coming to an end.

Expectations for the Federal Open Market Committee to lower interest rates increased dramatically after trade negotiations between the US and China stalled in May. President Donald Trump has increased tariffs on the second largest economy, drawing retaliation and threatening further escalations.

But with a meeting between Trump and Chinese President Xi Jinping planned for next week, most see policy easing in July at the soonest. The probability that the Fed will cut interest rates Wednesday is about 25%, according to CME's FedWatch tool .

"The case for easing is very weak, unless policymakers collectively are prepared to bet that the trade war with China is going to intensify dramatically," said Ian Shepherdson, the chief economist at Pantheon Macroeconomics. "Absent that, we see no sign that the economy is slowing by more than should be expected as the kick from last year's tax cuts fades."

Fed Chairman Jerome Powell has said the central bank was ready to act if trade conditions worsened. The Trump administration has prepared tariffs on another $300 billion worth of Chinese products, an escalation that would leave both economies reeling .

"We are closely monitoring the implications of these developments for the US economic outlook and, as always, we will act as appropriate to sustain the expansion," Powell said of trade negotiations at a June monetary policy conference in Chicago.

Trump argues that higher interest rates thwart growth in the economy and put the US at a disadvantage abroad, even suggesting at times that monetary policy should be wielded to gain leverage in his trade war with China.

"They devalue their currency, they have for years," Trump said of China in a CNBC interview in early June. "It's put them at a tremendous competitive advantage. And we don't have that advantage because we have a Fed that doesn't lower interest rates."

Economists say it's crucial that the Fed operates independent of political influence, but Trump regularly puts pressure on officials there. Bloomberg reported on Tuesday that the White House had in February examined whether it could demote Powell, a frequent target of the president's ire.

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