“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market” and stable inflation, Mr. Powell told Congress’s Joint Economic Committee on Wednesday.
“Of course, if developments emerge that cause a material reassessment of our outlook, we would respond accordingly,” he added.
The Fed cut its benchmark interest rate to a range between 1.5% and 1.75% at its policy meeting two weeks ago to cushion the economy against risks of a sharp slowdown from weakening business investment and global growth.
After an especially active few months for monetary policy, Mr. Powell indicated at a press conference on Oct. 30 that the central bank was comfortable entering a wait-and-see phase.
He largely repeated that message Wednesday, stressing that Fed policy wasn’t on a preset course. Asked if his statements meant that the Fed wouldn’t change interest rates over the next year, he said, “I wouldn’t say that at all.”
Investors don’t expect the Fed to cut rates at its final meeting of the year, on Dec. 10-11, and futures markets see a roughly 50% probability of one more rate cut by the middle of next year, according to CME Group.
In a speech Tuesday, President Trump criticized the Fed for keeping rates too high and said he envied nations in Europe that have rates below zero. “I want some of that money,” said Mr. Trump. “Our Federal Reserve doesn’t let us do it.”
Pressed by lawmakers to respond Wednesday, Mr. Powell said, “The very, very low and even negative rates that we see around the world would not be appropriate for our economy.” Negative rates abroad occur when “growth is quite low and inflation is quite low.”
None of the lawmakers on the committee, which is composed of 10 House members and 10 senators, joined Mr. Trump in criticizing the Fed.
Mr. Powell repeated his pledge that the Fed wouldn’t take politics into account when it makes policy decisions. He is slated to testify Thursday before the House Budget Committee.
Fed officials raised short-term interest rates four times last year to guard against undesirable levels of inflation or financial bubbles, but they have cut rates three times since July because of a slowdown in business investment and global growth that the U.S.-China trade war has amplified.
Mr. Powell said the economy’s baseline outlook remains favorable, partly owing to the Fed’s recent rate cuts. He flagged “noteworthy risks” to the Fed’s favorable outlook, namely trade policy and sluggish growth abroad.
The U.S.-China trade conflict worsened immediately after the Fed cut rates in July, but the Trump administration took steps last month to put trade talks back on track. Hopes for a trade truce have boosted investors’ optimism in recent weeks that the economy can avoid a downturn, with stock prices and long-term bond yields rising.
Mr. Powell said businesses continue to report that trade-policy uncertainty “is a real distraction for management,” he said. “It’s something that is weighing on business sentiment and ultimately on the economy.”
Fed officials have expected annual economic growth to slow to around 2% this year from nearly 3% last year. The question now is whether a contraction in business investment, which fell in the past two quarters, prompts deeper cutbacks in hiring and a downturn in consumer confidence and spending, which has buoyed output this year.
With inflation defying the Fed’s forecasts by holding slightly below the central bank’s 2% target this year, Mr. Powell said it is possible that Fed policy in recent years was supporting the economy less than officials expected or that the relationship between job-market slack and inflation had weakened.
“What we have learned...is that the U.S. economy can operate at a much lower rate of unemployment than many would have thought,” he said. Officials needed to have significant humility, Mr. Powell added, about the models and forecasts they use to set policy.
Fed officials have highlighted the risk that monetary policy will have less ability to counteract a future downturn because short-term interest rates and long-term bond yields are much lower than in past economic expansions. They are in the middle of a review of their policy-setting framework with an eye toward making their tools more potent.
In recent downturns, the Fed has cut its benchmark rate by around five percentage points. “We don’t have that kind of room” today, said Mr. Powell. “We’re too close—closer than we would like—to zero.”
As a result, Mr. Powell said lawmakers should be ready for fiscal policy to support the economy in a downturn.
At the same time, he warned that the long-term path of rising federal budget deficits and a higher debt load are unsustainable, which could “restrain fiscal policy makers’ willingness or ability to support economic activity during a downturn.” - WSJ
Content licensed from The Wall Street Journal.
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