Is Powell hitting back at Trump's criticism of the Federal Reserve?
President Trump has been highly critical of the Federal Reserve (Fed) policy and in particular Jay Powell's chairmanship. Trump has repeatedly called for quicker and larger rate cuts, and says the current level of US interest rates puts them at a disadvantage in comparison to Europe and Japan, where rates are negative. Trump, speaking at the Economic Club of New York, was happy to take credit for the strong economy but yet again called for negative rates. This week, Powell has been giving his semi-annual testimony to Congress and gently but firmly hit back at his critics.
Powell reiterated his support for the "goals of maximum employment and price stability that Congress has set for monetary policy" in his opening remarks. He also stated that Congress has given them an "important degree of independence" in order to effectively pursue these goals. Powell continues to be prepared to stand up to the President. The unemployment rate is close to a fifty-year low at 3.6%, meaning the US economy is close to operating at full employment, and therefore meets the needs set by the first goal. Core Personal Consumption Expenditures (PCE) inflation, the preferred measure of inflation, is at 1.7%. As the price stability goal is represented by a 2% target for inflation, this objective is also close to being achieved. Powell's comments on the state of the economy reflected weaker business investment, which is being restrained by sluggish global growth and trade developments. Overall, there are dangers in the US economy and rates have come down to offset these risks. Interest rate cuts do not have an instant impact and the effect of the latest round may take time to come through. This supports the comment that rates are at an "appropriate level" but they remain ready to adjust monetary policy should economic conditions deteriorate. On the positive side, there have been wage gains and personal consumption remains strong.
In a downturn, monetary policy can provide some support, but fiscal policy can also boost the economy. The Fed Chairman was more critical of government borrowing, noting that the Congressional Budget Office's recent long-term budget outlook said that the federal budget was on an unsustainable path with high and rising debt. He suggested "putting the federal budget on a sustainable path would aid the long-term vigor of the US economy and help ensure that policymakers have the space to use fiscal policy to assist in stabilising the economy if it weakens". This is likely to conflict with Trump's desire to cut taxes and increase spending.
What is clear from Powell's statement is that the Fed will respond to changes in economic conditions, rather than Trump's criticisms. They remain prepared to cut rates if needed, but note that policy is "not on a pre-set course". The Fed is likely to remain prudent, keeping its powder dry for when it is really needed.
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