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As Trump Calls for Cuts, Powell Stresses Limits of Fed Policy As Trump Calls for Cuts, Powell Stresses Limits of Fed Policy
(32 minutes later)
Jerome H. Powell, the Federal Reserve chair, kept future interest rate cuts squarely on the table on Friday while stressing that the central bank’s powers to right the economy were limited by President Trump’s trade policies, which continue to pose risks to the economic outlook. Federal Reserve Chair Jerome H. Powell on Friday kept future interest rate cuts squarely on the table but suggested the central bank is limited in its ability to counteract President Trump’s trade policies, which are stoking uncertainty and posing risks to the economic outlook.
“While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rule book for international trade,” Mr. Powell said, speaking from prepared remarks in Jackson, Wyo., at the Federal Reserve Bank of Kansas City’s annual symposium. “While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rule book for international trade,” Mr. Powell, speaking in Jackson, Wyo., said at the Federal Reserve Bank of Kansas City’s annual symposium.
“Our challenge now is to do what monetary policy can do to sustain the expansion” to achieve the Fed’s goals, he said. “Our challenge now is to do what monetary policy can do to sustain the expansion” to achieve the Fed’s goals of low unemployment and stable inflation, he said earlier in the speech.
Mr. Powell’s remarks indicated that the Fed, which cut interest rates in July for the first time in a decade, remains willing to cut again. But his reluctance to clarify the timing or size of any such move highlighted the central bank’s predicament: Unemployment is low and consumer spending is strong, but Mr. Trump’s trade conflict is stoking uncertainty, weighing on manufacturing and roiling markets. Mr. Powell’s remarks indicate that the Fed, which in July cut interest rates for the first time in a decade, remains willing to cut again in order to keep the economy growing.
“Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Mr. Powell said, adding that there were “no recent precedents to guide any policy response to the current situation.” But his reluctance to clarify the timing or size of any move highlights the central bank’s predicament: While unemployment is low and consumer spending is strong, Mr. Trump’s trade conflict is stoking uncertainty, weighing on manufacturing, and roiling markets. And the Fed is limited in its ability to resolve unpredictability.
His comments followed Beijing’s announcement on Friday that China would retaliate against Mr. Trump’s next round of tariffs by increasing taxes on $75 billion of American imports, including agricultural products, crude oil and cars. China and the United States plan to increase their levies in September and December, which could create more economic harm. “Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Mr. Powell said, adding that there are “no recent precedents to guide any policy response to the current situation.”
Against that backdrop, some members of the policy-setting Federal Open Market Committee support rate cuts to shore up growth, while others want to wait to monitor how the dispute plays out. His comments came as China announced on Friday that it would retaliate against Mr. Trump’s next round of tariffs by increasing taxes on $75 billion worth of American products, including agricultural products, crude oil and cars. Both countries plan to up their levies in September and December, which could exacerbate the economic harm from a trade war that is already causing financial pain across the globe.
“Risk management enters our decision making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy,” Mr. Powell said on Friday. Against that backdrop, some members of the policy-setting Federal Open Market Committee support rate cuts to shore up United States economic growth, while others want to adopt a wait-and-see approach to monitor how the situation plays out.
Mr. Trump has made no secret that he wants a big rate cut. He regularly criticizes the Fed on Twitter and in speeches, urging it to cut rates more aggressively to even the playing field with trading partners like China and Germany. “Our Federal Reserve does not allow us to do what we must do,” he said in a tweet on Thursday, adding that they “move like quicksand. Fight or go home!” “Risk management enters our decision making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy,” Mr. Powell said.
On Friday, Mr. Trump said on Twitter that the strong economy should give the Fed confidence to cut. Mr. Trump, who regularly accuses the Fed of slowing the economy by raising rates in 2018 and has urged it to cut aggressively, lashed out at Mr. Powell after the remarks.
“As usual, the Fed did NOTHING!” Mr. Trump said in a tweet. “My only question is, who is our bigger enemy, Jay Powel or Chairman Xi?,” the president wrote, a reference to Chinese President Xi Jinping.
Mr. Trump, who appointed Mr. Powell to a four-year term, has said the Fed should use monetary policy to create a more even playing field with trading partners like China and Germany, which he believes are weakening their currencies and lowering rates to gain an economic advantage.
“Our Federal Reserve does not allow us to do what we must do,” he said in a tweet on Thursday, adding that they “move like quicksand. Fight or go home!”
Investors fully expect a rate cut in September and anticipate another before the end of the year, based on market pricing measured by the CME Group.Investors fully expect a rate cut in September and anticipate another before the end of the year, based on market pricing measured by the CME Group.
Fed officials often point to two mid-1990s rate-cutting cycles as rough templates for how the central bank is approaching policy now. In both instances, Fed officials cut rates by 75 basis points to help get the economy through rough patches. Fed officials often point to two mid-1990s rate cutting cycles as rough templates for how the central bank is approaching policy now. In both cases, the Fed cut rates by 75 basis points to get the economy through rough patches.
Mr. Powell referred to those episodes in his remarks on Friday, noting that “the Fed was cutting, not raising, rates in the months prior to the end of the first two expansions in this era, and the ensuing recessions were mild by historical standards.” Mr. Powell referenced those episodes in his remarks Friday, noting that “the Fed was cutting, not raising, rates in the months prior to the end of the first two expansions in this era, and the ensuing recessions were mild by historical standards.”
Speaking earlier on Friday on Bloomberg Television, James Bullard, the president of the Federal Reserve Bank of St. Louis, said those examples offered a “great baseline” for reference in setting policy now, although he did not commit to matching their size. Federal Reserve Bank of St. Louis President James Bullard, speaking earlier on Friday on Bloomberg Television, called those instances a “great baseline” to reference for policy now, though he did not commit to matching their size. “That’s what they did in the ‘90s, I don’t know where we’ll end up.”
“That’s what they did in the ’90s,” Mr. Bullard said. “I don’t know where we’ll end up.” The Fed is also contending with inflation that has run stubbornly below its 2 percent goal, the level it views as consistent with a healthy economy. The need to return inflation to its goal quickly was one reason that the central bank cut rates in July.
While policymakers have historically set interest rates to keep very-low unemployment from spurring faster inflation, Mr. Powell’s remarks show how that the calculus is changing.
Mr. Powell noted that in the 1990s, the Fed was able to cut rates to support employment “without destabilizing inflation.” At another point in the speech, he said that “low inflation seems to be the problem of this era, not high inflation.”