Janet Yellen says the Fed’s next rate action may be a cut

Wall Street is anxiously reading the Federal Reserve’s tea leaves about when it will next hike rates. Janet Yellen says the Federal Reserve could wind up cutting interest rates if the US economy slows down.

“If global growth really weakens and that spills over to the United States, where financial conditions tighten more and we do see a weakening in the US economy, it’s certainly possible that the next move is a cut,” the former central bank chair told CNBC on Wednesday.

Yellen said she expects the most likely outcome is solid growth in 2019, but she mentioned several risks, including weak economic data from China and Europe, as well as uncertainties about trade policy and Brexit.

Yellen’s remarks come after the Federal Reserve suggested it might be done considering any rate hikes this year. Weeks earlier, the Fed suggested that as many as two increases were on the table.

Yellen added that “both outcomes are possible,” meaning the Fed could also raise rates if conditions call for it — that is, if economic growth is strong this year and the labor market continues to tighten.

Right now, though, she said it makes sense for the Fed to be patient, especially since those upside risks don’t seem all that pressing.

“We’ve seen wage growth move up some as the labor market has tightened, but not a lot,” Yellen added. “We’re not seeing strong inflationary pressures, if any, emerge.”

Yellen isn’t the first person to suggest that a rate cut might be in the cards, and Wall Street has already priced in one rate cut at the end of the year. The CME FedWatch tool, which looks at the probability of rate moves, shows that there are slightly higher odds of a rate cut than a rate hike, according to a recent research note from Ameriprise chief market strategist David Joy.

He also noted that the tool shows that there is an 86% chance the year ends without any further changes.