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Federal Reserve Chairman Jerome Powell said the U.S. economy is in a favorable place but faces “significant risks,” reinforcing bets for another interest-rate cut next month though the remarks failed to mollify President Donald Trump.
“Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Powell said Friday in a speech to the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming, minutes after China announced it would impose additional tariffs on $75 billion of American goods.
“We will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2% objective,” the chairman said.
Treasury yields fell after Powell’s remarks and traders of fed funds futures extended slightly the amount of easing they expect from the U.S. central bank this year. That trend increased after Trump said he would respond to the latest Chinese tariff news, with U.S. stock prices dropping over 1%. Fed officials next meet Sept. 17-18.
Powell “is trying to set the record straight,” said Priya Misra, head of global rates strategy at TD Securities USA. “They are aware of higher risks since July 31, and they are saying they can ease while not ringing any alarm bells.”
Trump, who has been repeatedly calling on the Fed to cut rates to support the economy during his trade war, immediately criticized Powell after the speech, tweeting “as usual the Fed did NOTHING.”
It would be unusual for Fed officials to cut rates at Jackson Hole -- outside of a normally scheduled policy meeting -- unless there were signs of a sharp downturn or a financial panic. Trump added that the U.S. has a strong dollar and a “very weak Fed,” and said he would “work ‘brilliantly’ with both.”
Citing slowing global growth and muted inflation, the Fed cut interest rates last month for the first time in more than a decade, reducing its target range by a quarter-percentage point to 2%-2.25%. Powell described the rate reduction at the time as “a mid-cycle adjustment to policy,” telling reporters on July 31 that it wasn’t the beginning of a long series of cuts.
But in his remarks Friday, Powell didn’t use that characterization and noted that events since that meeting “have been eventful.”
“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,” Powell said, also mentioning one of the running salvos in Trump’s trade war with China.
The chairman also stressed that the Fed had a limited ability to cushion the headwinds from uncertainty stemming from the escalating trade war.
“In principle, anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy,” Powell said. “There are, however, no recent precedents to guide any policy response to the current situation.”
“He certainly didn’t lean against the September ease, which the markets have priced in,” said William English, a professor at Yale University and former senior Fed economist. “If he thought they were priced in the wrong place I think he would have put in a bit more protest, and this didn’t feel to me like he was protesting.”
Investors have fully priced in another quarter point reduction at next month’s meeting and Powell’s remarks suggest the committee remains on alert for risks in the economy.
“We are carefully watching developments as we assess their implications for the U.S. outlook and the path of monetary policy,” Powell said.
Powell’s remarks examined U.S. monetary policy since World War II. He broke the analysis into three long-run questions: Can the central bank restrain inflation? Can the central bank buffer inevitable financial excess? Can the central bank still provide stimulus and counter-cyclical policy in a time of very low interest rates?
He answered the first two positively, saying that the Fed has the tools to quell inflation, while the post-crisis financial system is more resilient and monitoring has improved. Answers on the third question are a work in progress, he said.
“Our economy is now in a favorable place, and I will describe how we are working to sustain these conditions in the face of significant risks we have been monitoring,” he said.
Hawks vs Doves
The chairman may face opposition from some of his colleagues at next month’s meeting. The July rate cut drew two dissents in favor of holding policy steady, from Kansas City Fed chief Esther George and Boston’s Eric Rosengren, and both reiterated this week that they want to see more evidence of a U.S. slowdown before moving rates again.
Philadelphia Fed President Patrick Harker and Cleveland’s Loretta Mester made similar arguments on Friday. “Right now, we are where we need to be,” Harker said in a Bloomberg Television interview. “There are clearly downside risks to the economy. We would have to act as appropriate if those look like they are coming to fruition.” Neither of them are voters this year on the rate-setting Federal Open Market Committee.
(Updates with Fed presidents pushing back on need for cuts in final two paragraphs.)
--With assistance from Christopher Condon.
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