Did Fed Chair Powell Just Wink and Commit to More Rate Cuts?

Jon C. Ogg

Federal Reserve Chair Jerome Powell spoke in Jackson Hole, Wyoming, on Friday at the Challenges for Monetary Policy annual symposium. The notion that the title includes “Challenges” should speak for itself, particularly with a trade war and with President Trump chastising Powell for not cutting interest rates anywhere aggressively or fast enough. The takeaway from this speech is that more rate cuts seem likely, assuming that’s what the Federal Reserve’s Federal Open Market Committee (FOMC) meeting time dictates.

While these speeches tend to include a lot of “Fed speak” and roundabout comments, the long and short of the matter might go down as this on top of a complex and turbulent geopolitical environment: The Fed will act as appropriate to sustain the expansion; we are carefully watching developments abroad; the Fed faces heightened risk of difficult to escape periods of near-zero rates; and we see financial stability risks as moderate but will remain vigilant.

While those are paraphrases, Powell is including language that would allow for multiple other avenues of tools to use with monetary policy ahead. He said:

We are examining the monetary policy tools we have used both in calm times and in crisis, and we are asking whether we should expand our toolkit. In addition, we are looking at how we might improve the communication of our policy framework.

Low inflation has been the main concern for the past decade, rather than high inflation, and the question remains after more than a 10-year recovery: Do long expansions inevitably breed financial excesses? On this, Powell said:

We have not seen unsustainable borrowing, financial booms, or other excesses of the sort that occurred at times during the Great Moderation, and I continue to judge overall financial stability risks to be moderate. But we remain vigilant.

One note also suggests that the most important effects of monetary policy are felt with uncertain lags of a year or more, and risk management enters the Fed’s decision-making. On communications and transparency and other key issues:

We have a responsibility to explain what we are doing and why we are doing it so the American people and their elected representatives in Congress can provide oversight and hold us accountable …

Fitting trade policy uncertainty into this framework is a new challenge; Setting trade policy is the business of Congress and the Administration …

While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade …

Powell is still maintaining that the glass is half-full rather than half-empty, with caveats:

The outlook for the U.S. economy since the start of the year has continued to be a favorable one. Business investment and manufacturing have weakened, but solid job growth and rising wages have been driving robust consumption and supporting moderate growth overall. … The global growth outlook has been deteriorating since the middle of last year. Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States.

There is also hope that more rate cuts are coming, on top of July’s cut:

Committee participants have generally reacted to these developments and the risks they pose by shifting down their projections of the appropriate federal funds rate path. Along with July’s rate cut, the shifts in the anticipated path of policy have eased financial conditions and help explain why the outlook for inflation and employment remains largely favorable.

Powell further noted that the Fed members are carefully watching developments on the U.S. outlook and the path of monetary policy. This where the rate cut hopes will come into play:

The three weeks since our July FOMC meeting have been eventful, beginning with the announcement of new tariffs on imports from China. We have seen further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile. Long-term bond rates around the world have moved down sharply to near post-crisis lows. Meanwhile, the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent. Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective.

And on looking backward and forward, Powell said:

We face heightened risks of lengthy, difficult-to-escape periods in which our policy interest rate is pinned near zero. To address this new normal, we are conducting a public review of our monetary policy strategy, tools, and communications—the first of its kind for the Federal Reserve. We are evaluating the pros and cons of strategies that aim to reverse past misses of our inflation objective. We are examining the monetary policy tools we have used both in calm times and in crisis, and we are asking whether we should expand our toolkit. In addition, we are looking at how we might improve the communication of our policy framework.

Powell’s full speech can be found here.