Federal Reserve Chairman Jerome Powell said Tuesday afternoon that the Fed is “insulated” from short-term political pressure, warning that huge policy mistakes can happen when the Fed is influenced by the White House.
“Congress chose to insulate the Fed this way because it had seen the damage that often arises when policy bends to short-term political interests,” Powell said at a speech in New York.
Powell later added that central banks across the world have experienced episodes of lacking political independence, which lead to “bad things” happening.
“That includes experiences here in the United States,” Powell said.
Powell’s remarks come amid President Donald Trump’s open criticism of Fed policy in recent weeks. Leading up to the Fed’s June meeting, Trump lamented that the central bank had not lowered rates, speculating that the stock market would be 10,000 points higher if the Fed had an eased monetary policy.
Last Wednesday the Federal Open Market Committee opted to hold rates steady at the current target range of 2.25% to 2.5%, and Powell said in the press conference that the “law is clear” that he has a four-year term.
“I fully intend to serve it,” Powell said June 19.
On Tuesday morning, Trump told The Hill that he has the power to remove Powell “if I wanted to, but I have no plans to do anything.”
The Federal Reserve Act says the president can only remove a sitting chair “for cause,” but no president has formally attempted to do so in the past — meaning there’s no precedent laying out why a chair could be legally removed.
Monetary policy outlook
On Tuesday, Powell delivered a brief update on the economic outlook, reiterating that the central bank will “act as appropriate to sustain the expansion.” Powell used the same language in the June 19 meeting, where some market participants read the new wording as teeing up a rate cut as early as July.
But Powell said the baseline outlook for the economy “remains favorable,” noting though, that risks to that outlook have grown amid trade tensions and slower global growth.
Those remarks took some air out of hopes for a 50 basis point rate cut, as did an Bloomberg interview with St. Louis Fed President James Bullard, in which the FOMC voter said he does not see a need for a 50 basis point cut at the moment..
Powell’s remarks are his first in public since the June 19 meeting, and new data have already come in showing a darker outlook. The Dallas Fed’s manufacturing survey showed Texas companies having the gloomiest outlook on the economy in three years, and have held back on capital expenditures as a result.
Powell said trade developments are leading to a drop in business confidence. During questioning at the event, Powell said concerns have heightened “quite substantially” over the past few weeks, but said the “mechanical effects” on demand have been “meaningful but not large.”
But the picture on the consumer side may be darkening, as well. On Tuesday morning, consumer confidence dropped to the lowest level since September 2017.
Powell said consumer data still appears “very solid.” Earlier in his appearance Powell maintained that the Fed would not “overreact to any individual data point or short-term swing in sentiment.”
The Fed’s next policy-setting meeting will take place July 30-31.
Brian Cheung is a reporter covering the banking industry and the intersection of finance and policy for Yahoo Finance. You can follow him on Twitter @bcheungz.