If financial markets were looking for a signal that the FOMC is prepared to cut short-term rates again — and they were — they did not get it beyond the usual boilerplate of the Fed acting as appropriate. Chair Jerome Powell’s speech on “Challenges for Monetary Policy” before the Jackson Hole Symposium took an academic turn suitable to the conference which is intended for research and discussion. Powell bowed to the inevitable expectations that his comments would be examined for hints to current monetary policy. What he essentially said was a reiteration of what most Fed Chairs have said in recent years: monetary policy is made based on data and developments, and is undertaken in the context of the dual mandate for maximum employment and price stability.
Powell’s remarks highlighted that it is trade policy and the slowdown in global economic growth that presents the greatest risk to the US economic outlook. However, he also said that it is the responsibility of policymakers to “look through” near term noise and assess the fundamentals. Powell noted that as far as the dual mandate is concerned, the outlook is and continues to be “favorable”.
He said, “Turning to the current context, we are carefully watching developments as we assess their implications for the U.S. outlook and the path of monetary policy. The three weeks since our July FOMC meeting have been eventful, beginning with the announcement of new tariffs on imports from China. We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile. Long-term bond rates around the world have moved down sharply to near post-crisis lows. Meanwhile, the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent. 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 percent objective.” [emphasis added]
This is not ignoring that the risks are present, but also points out that at home, the impact has been limited. That financial markets are volatile does not necessarily require an immediate response on the part of the FOMC as long as the economic data is healthy. Powell certainly did not close off the possibility of further rate cuts, but he also noted that, “Committee participants have generally reacted to these developments and the risks they pose by shifting down their projections of the appropriate federal funds rate path. Along with July’s rate cut, the shifts in the anticipated path of policy have eased financial conditions and help explain why the outlook for inflation and employment remains largely favorable”.
Powell’s position as Chair means he speaks for the FOMC as a whole. This is particularly tricky at the moment due to the divergence of views among policymakers. There are extremes at both ends of the spectrum with a few doves — notably St. Louis’ James Bullard and Minneapolis’ Neel Kashkari — calling for more and larger cuts, and more moderate ones — Boston’s Eric Rosengren and San Francisco’s Mary Daly — as well as the traditionally more hawkish — Kansas City’s Esther George — urging a wait-and-see approach to further provision of interest rate accommodation.
Given the heating up of the trade war with China, the FOMC may be forced to act again to support the economy and/or offer a little reassurance that it is on top of things. But if it does, the consensus will do so with some reluctance as long as the unemployment rate hovers near 50-year lows and inflation inches back toward the Fed’s 2% objective. Responding to trade uncertain trade policy is not the Fed’s remit and using monetary policy as a weapon in a trade war is not the Fed’s mandate. The central bank will not want to be drawn into trying to bolster economic growth damaged by poorly considered and implemented trade policy, but may be forced to to address a possible downturn.
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