By Greg Robb, MarketWatch
Reuters Enlarge Image
Federal Reserve Chairman Jerome Powell on Friday said the central bank was “carefully watching developments” in the economy and would “act as appropriate,” but stopped short of promising any specific interest-rate easing steps.
In a closely-watched speech in Jackson Hole, Powell said he and his colleagues were trying to assess “this complex, turbulent picture” that has emerged in August, with financial markets volatile as Trump’s trade war with China escalates and the global economy weakens as a result.
In his wry, understated, way, Powell said “the three weeks since our July meeting have been eventful.”
But he said the Fed was working to sustain a favorable economy “in the face of significant risks.”
Investors think another interest-rate cut in September is a done deal, but comments from other Fed officials at Jackson Hole show the FOMC rate setting committee is split. Many officials want the Fed to keep interest rates on hold, but others are backing another rate cut.
The Fed cut its policy interest rate by a quarter percentage point in July, for the first time in a decade, a move that Powell called a “mid-cycle adjustment.” He did not repeat that phrase in this speech.
The Fed chairman did argue that the July rate cut has eased financial conditions and helped explain why the outlook for inflation and employment looks favorable.
In one more hawkish passage, Powell said inflation “seems to be moving up closer to 2%.” Some monetary policy doves had pointed to low inflation as one reason for more easing.
But Powell was not closing the door on more easing even though he spoke at length about how the strong job market was extending employment to more Americans that were “still left behind.”
“Our challenge now is to do what monetary policy can do to sustain the expansion,” he said.
Powell tried to maintain flexibility to respond to developments at the Fed’s next policy meeting in mid-September.
“Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion,” Powell said.
Ellen Zentner, chief U.S. economist at Morgan Stanley, said that, reading between the lines, she detected Powell has a bias towards easing and would follow through with a quarter-point rate cut at the Fed’s next meeting.
Zenther said the more hawkish views from regional Fed bank presidents has shut the door for now on a half percentage point rate cut.
Powell said “there are no recent precedents to guide any policy response to the current situation.”
One “new challenge” to the Fed was fitting uncertainty over international trade policy into the Fed’s analysis framework.
The U.S. and China trade war heated up again only one day after the Fed cut rates in July when Trump announced extra tariffs on Chinese imports.
In a passage in his speech that seemed a swipe at President Donald Trump, Powell said interest rate policy “cannot provide a settled rulebook for international trade.”
Trump reacted with fury to Powell’s speech, asking in a tweet if Powell was a bigger “enemy” than Chinese president Xi Jinpeng.
The Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.95% was volatile in morning trading, dropping after Trump responded to the latest round of Chinese import tariffs on U.S. goods by “ordering” U.S. companies to manufacture in America rather than overseas. Trump’s tweet created precisely the kind of uncertainty for businesses that Powell referred to in his speech.