Federal Reserve chairman Jerome Powell. Photo / Getty Images
The Federal Reserve chair, Jerome Powell, said Friday that the central bank remained committed to keeping the United States economic expansion going, in remarks that signalled he and his colleagues are likely to cut interest rates for a second time at its coming meeting.
"The Fed has, through the course of the year, seen fit to lower the expected path of interest rates," Powell said, adding "that's one of the reasons why the outlook is still a favourable one, despite these crosswinds we've been facing."
"We're going to continue to act as appropriate to sustain this expansion," Powell said, speaking in a question-and-answer session in Zurich.
While Powell said nothing to cement a coming rate cut, his comments did little to walk back investors' expectations for a move in September, suggesting that the central bank is comfortable with the outlook that it will act again. His remarks are the Fed's last chance to foreshadow whether the central bank will cut rates at its next meeting on Sept. 17-18 in Washington. A premeeting quiet period, during which officials do not make public remarks related to monetary policy, starts on Saturday.
The Fed chair spoke only hours after the government's August jobs report showed that hiring was holding up, with employers adding 130,000 jobs last month, and that wages were rising in the United States. It comes even as uncertainty caused by President Donald Trump's continuing trade war aggravates a slowdown in manufacturing and dents some indicators of consumer and business confidence.
"Our labour market is in quite a strong position," Powell said Friday, while noting that the Fed is watching economic threats including uncertainty related to trade, low inflation and slower global growth.
"Our main expectation is not at all that there will be a recession," he said, adding that "there are all these risks, and we're monitoring them very carefully and we're conducting policy in a way that will address them."
The Fed cut rates for the first time in more than a decade in July as it tried to insulate the United States from Trump's trade war and a global slowdown. Market pricing suggests that investors expect another quarter-point reduction this month.
Trump has been pushing the Fed to cut rates more aggressively and blaming it for holding back growth, which has failed to sustain the 3 per cent pace he had promised.
He repeated his criticism of the Fed's policies on Friday, saying that the Fed should lower rates and lamenting that he chose Powell to lead the central bank.
Powell reiterated his view on Friday that politics play no part in the Fed's decision-making, saying that partisanship is "not our DNA."
"Political factors play absolutely no role in our process, and my colleagues and I would not tolerate any attempt to include them in our decision-making or our discussions," he said. "We're strongly committed to nonpolitical decision-making. We serve all Americans, regardless of their political party."
His pushback comes after William Dudley, a former president of the Federal Reserve Bank of New York, suggested in a recent opinion piece that the Fed should consider how its policies might affect the outcome of the 2020 election. Dudley has since caveated some of those comments, which many economists worried would make the Fed appear political.
The Fed operates independently of the White House and aims for low and stable inflation and maximum employment — jobs Powell said it was narrowly focused on. But it has been harder to judge how to achieve those goals in 2019. Recently, the policy-setting Federal Open Market Committee has been divided over whether rates need to be lowered again.
Key officials, including John C. Williams, the president of the Federal Reserve Bank of New York, have been noncommittal about whether and when they want to adjust borrowing costs next, but have also done little to walk back market expectations for additional moves. Regional presidents Esther George and Eric Rosengren have recently indicated that they were not yet fully convinced a cut is needed, after both dissented against the Fed's July decision. But James Bullard, the president of the St. Louis Fed and a monetary policy voter this year, wants to cut rates by half a percentage point.
"Sometimes it's easy to get unanimity on things when the path is clear. Other times it's murky out there and there is a range of views," Powell said, adding "this is one of those times."
Economic data are giving rise to the tension by sending mixed signals.
There is plenty of bad news: A closely-watched index of manufacturing activity fell into contraction in August. Global growth is slowing. The University of Michigan's consumer sentiment index posted a sharp decline, with one in three respondents spontaneously mentioning tariffs.
The Fed's regional banks report that many business contacts are holding off on investments as they wait to see how the trade war plays out.
"For businesses, particularly that make longer term investments in equipment or software, they want some certainty that demand will be there, certainty about growth, that the supply chain will be secure," Powell said.
But service industries are holding up and consumer spending, which makes up almost 70 per cent of the US economy, has come in strong. The August jobs report showed that employers added 130,000 workers last month, and average hourly earnings climbed 3.2 per cent over the year. While employment growth has slowed, it has remained strong enough to keep the unemployment rate near a half-century low.
The question is what will happen next. Geopolitical risks eased somewhat this week, as the risk of an imminent no-deal Brexit waned and China and the United States agreed to resume talks, but trade tensions are likely to persist. They seem to be slowing business investment and holding back growth, which could threaten future growth. A key bond market recession indicator is flashing red.
Central banks around the world are cutting interest rates and trying to encourage borrowing as signs that the global economy is slowing proliferate.
The People's Bank of China on Friday cut the amount of money that banks are required to keep in reserve, a step that will increase the amount of money available for lending and will lead to lower interest rates, and the European Central Bank is expected to cut one of its main interest rates when its governing council meets on Thursday.
In the United States, inflation has already run shy of the Fed's target of 2 per cent for most of the expansion, weakness imported from abroad could make it harder to hit that mark, undermining the central bank's credibility and leaving it with less room to cut interest rates — which incorporate price gains — going forward. Prices climbed by just 1.4 per cent in July, based on data from the Commerce Department.
"Low inflation is indeed the problem of this era," Williams, the head of the New York Fed, said this week. "The current outlook of moderate growth, low unemployment, but stubbornly low inflation is a reflection of the broader economic picture."
Written by: Jack Ewing and Jeanna Smialek
© 2019 THE NEW YORK TIMES
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