By Nick Timiraos 

Federal Reserve Chairman Jerome Powell pushed back against President Trump's repeated demands for lower interest rates -- citing the central bank's decadeslong independence -- while explaining why it might nevertheless cut interest rates soon.

"The independence of the Fed from direct political control is an important institutional feature that has served the country well, served the economy well," Mr. Powell said in remarks at the Council on Foreign Relations in New York. "When you see central banks lacking those protections, you see bad things happening -- and that includes, by the way, our experience here in the United States."

Still, Mr. Powell said the central bank might cut rates due to a hit to the economic outlook from rising uncertainty by the Trump administration's trade policies. While the amount of tariffs currently in place against China and other countries "is not large enough to represent, itself, a major threat to the economy," Mr. Powell said officials are concerned about and carefully watching for signs of "a loss of confidence or financial market reaction."

Mr. Trump has sharply criticized the Fed's decisions, first to raise interest rates and more recently, to hold them steady. He has called on the Fed to cut its benchmark rate, currently between 2.25% and 2.5%, by 1 percentage point.

"Think of what it could have been if the Fed had gotten it right," Mr. Trump said on Twitter on Monday. "Now they stick, like a stubborn child, when we need rate cuts.... Blew it!"

In an interview on NBC's "Meet the Press" on Sunday, Mr. Trump said he wasn't considering removing Mr. Powell as the central bank's leader but said he believed he could do so. Such a step could severely undermine the Fed's independence to set interest rates with an eye toward the long-run health of the economy.

Mr. Powell didn't directly address those remarks on Tuesday, but he has previously indicated he doesn't believe he can be removed from his four-year term over a policy dispute. He has said he has no plans to leave office before his term expires in 2022.

Mr. Powell said the central bank didn't want to be drawn into a broader political fight. "We're human. We'll make mistakes -- I hope not frequently," he said. "But we won't make mistakes of integrity or character." He said earlier episodes where the central bank acceded to political pressure to spur short-term growth didn't turn out well, including runaway inflation the U.S. experienced in the 1970s.

Fed officials agreed to hold rates steady last week, but nearly half of the reserve bank presidents and governors who participate in the rate-setting committee's deliberations indicated they judged the economy could require lower rates before year's end.

The central bank has already shifted its policy stance once this year. In January, Mr. Powell shelved plans for the Fed to continue raising rates after market volatility soared in the days following the most recent interest rate increase last December.

On Tuesday, Mr. Powell largely repeated points he made in his press conference after last week's Fed meeting. Officials felt confident in the U.S. growth outlook and their policy position as recently as early May, before Mr. Trump announced plans to increase tariffs on Chinese imports to 25% from 10% following a setback in trade negotiations.

"Quite a lot has changed," Mr. Powell said. "The global risk picture has changed, really just in the last six to eight weeks. And it's around trade developments and concerns about global growth."

In addition, Fed officials have changed their view about recent inflation dynamics, he said. The central bank raised interest rates four times last year, in part due to an expectation that price pressures would build across the economy.

Inflation ran at the central bank's 2% inflation target as recently as December, but since then has declined. Core prices, which exclude volatile food and energy categories, dropped to 1.6% in April, according to the Fed's preferred inflation gauge.

In May, Mr. Powell indicated temporary declines in a handful of price categories, together with an outlook that favored strong growth this year, would keep inflation moving back to its 2% target.

Now, the inflation shortfall "looks like it may be more persistent than we had hoped," Mr. Powell said. Fed officials regard a sustained run of inflation below the central bank's target as "another argument, frankly, for providing" lower interest rates, he said.

Stock markets have rallied since the Fed signaled a stronger bias toward rate cuts last week, and investors in interest-rate future markets fully anticipate at least one quarter-percentage-point rate cut at the next meeting on July 30-31. Mr. Powell didn't push back against those expectations on Tuesday.

For the second time in a week, Mr. Powell favorably cited economic research that says when interest rates are historically low, the Fed should act pre-emptively to avoid a steeper downturn. "This is fairly widely accepted," Mr. Powell said. "If you see weakness, it's better to come in earlier rather than later just as a general principle."

Markets are divided over whether the Fed will cut rates by one quarter percentage point or by a half percentage point. If the Fed does cut interest rates, Mr. Powell said Tuesday the size of any reduction would depend on the economic outlook.

St. Louis Fed President James Bullard, who dissented in favor of lower interest rates last week, separately on Tuesday said he didn't think the Fed needed to cut its benchmark by more than one quarter percentage point at its next meeting.

Write to Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

June 25, 2019 17:50 ET (21:50 GMT)