Fed’s Powell reiterates case for interest rate cuts amid increased economic risks

Federal Reserve Chairman Jerome Powell said that the downside risks to the U.S. economy have increased recently, reinforcing the case among policy makers for somewhat lower interest rates.

“Crosscurrents have reemerged, with apparent progress on trade turning to greater uncertainty and with incoming data raising renewed concerns about the strength of the global economy,” Powell said Tuesday in the text of remarks to be delivered at the Council on Foreign Relations in New York.

His comments echoed those he made last week following the Federal Open Market Committee meeting. Powell said before answering questions at the event that he intended Tuesday’s remarks to be fully consistent with what he said last week.

“Many FOMC participants judge that the case for somewhat more accommodative policy has strengthened,” he added.

Stocks in the U.S. bounced off lows after Powell’s comments. Treasury 10-year yields fell back below 2 per cent.

A consensus is building that Powell and his colleagues on the Federal Open Market Committee will cut interest rates in coming months, as trade disputes hurt the outlook for the world economy. That’s what investors and analysts now expect — and what President Donald Trump is loudly demanding.

Fed Independence

Powell did not mention Trump by name in his opening remarks to the council. But he did highlight the importance of the central bank’s autonomy from political interference.

“The Fed is insulated from short-term political pressures — what is often referred to as our independence,” Powell said. “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.”

Trump has criticized the central bank for keeping credit too costly and for failing to lower interest rates last week. Policy makers “blew it” on June 19 when they kept the benchmark overnight rate unchanged at just under 2.5 per cent, Trump tweeted on Monday. He compared the Fed to a “stubborn child.”

Some of those policy makers did in fact advocate for a rate cut at last week’s meeting, including St. Louis Fed chief James Bullard and the Minneapolis Fed’s Neel Kashkari. They were driven by concern that inflation is stuck below the central bank’s 2 per cent target — suggesting that there’s room to stimulate the economy, helping to create more jobs and boost wages, without pushing prices too high.

Economic Data

The U.S. economy is slowing after a stronger than expected first quarter. Sales of new U.S. homes fell to a five-month low in May while consumer confidence dropped in June to its lowest level since September 2017, according to reports Tuesday.

“The limited available evidence we have suggests that investment by businesses has slowed from the pace earlier in the year,” Powell said.

The Fed chairman said the economic outlook basically remained promising, with unemployment near historic lows.

“However, the risks to this favourable baseline outlook appear to have grown,” he said.

Bloomberg.com

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