–Sees ‘Cautious Optimism’ Growing About the Global Economy
By Denny Gulino
WASHINGTON (MaceNews)- Federal Reserve Chair Jay Powell, carefully reading some answers from a script, Wednesday afternoon said it is too soon to know the effect of the Wuhan virus on China’s economy but the U.S, is somewhat insulated because its economy mainly depends on domestic transactions.
With the Federal Open Market Committee standing still as expected and issuing a policy statement virtually unchanged from the previous statement, Powell dealt with a large number of questions about the Fed’s support of the repo market and kept repeating the current program of adding reserves will continue at least into the second quarter.
He again emphasized that the Fed does not regard its buttressing of the money markets with nearly $400 billion in purchases of treasuries so far as a monetary policy operation, only a procedure to establish a floor of $1.5 trillion that bank reserves don’t fall through regardless of seasonal volatility.
“When we see that we’ve reached that level,” he said, “we can gradually reduce our asset purchases to the level of underlying trend growth.” Powell read that response and some others from prepared texts, a testament to his increased caution after some criticism that his answers were not precise enough.
“We’re not at that stage” of deciding to alter the support of the money market. “It’s January,” he said.
On China, Powell said its authorities have been sticking to their program begun a couple of years ago to cut back on the non-sovereign debt which had been very large, even through trade negotiations. It is clear that the Wuhan virus restrictions will affect China’s economy, he said, and it remains to be seen if the deleveraging is maintained.
He characterized the Fed’s view of the level of vulnerability of the U.S. financial system to various negative factors as only “moderate.”
The labor market is “strong” and the labor participation rate has been above what was expected. The number of new entrants to the labor force could be one factor keeping wages from more acceleration.
As it is, the roughly 3% rate of wage growth is about “theoretically” what could be expected given the U.S. economy’s rate of productivity and inflation.
“It’s a bit surprising that with the sustained levels of historically low employment we haven’t seen wages going up above that level as we have in other long expansions with period of low unemployment,” he said. Another reason might be the natural rate of unemployment is lower that thought.
Powell conceded that “inflation rate averaging” could be an approach adopted after the current framework review is completed, expected, he said, around the middle of the year. The existing framework, he added, has been adequate to achieving Fed goals though “we do struggle as other central banks do with inflation goals.”
He said he is “very, very pleased” with the framework review so far and Fed policymakers are “just at the point of coming together” around a set of recommendations.
Overall Powell broke no new ground in his news conference, leaving the impression he and his colleagues are perfectly happy with their no-action stance. He provided no hint at when it will be time to go in a new direction other than to repeat it would take a “material” change in economic conditions.
The global economy, he said, now merits “cautious optimism” after the considerable challenges through last year, including trade uncertainty, Brexit and other factors. He added, however, that the uncertainty about trade is “still there,” with substantial tariffs in place and more negotiations to come.
The “Phase One” agreement with China and the USMCA that President Trump signed earlier in the day – and which still needs Canada ratification – has reduced uncertainty, he said. He noted “manufacturing PMIs have begun to tick up,” possibly reflecting the trade developments.
Business investment might respond to improved global conditions and there could be renewed growth, he said. That the U.S. economy is about 85% dependent on domestic purchases and not trade, reduces the U.S. vulnerability to adverse circumstances elsewhere.
“We have a much smaller external sector,” than China, he said. At the same time, China’s economy has grown to be a much bigger part of the global economy.
Powell repeated that in a narrow sense, climate change is not the Fed’s responsibility given all the other arms of government addressing the problem. More broadly, he said, “We’ll ensure the financial system is resilient, robust” as it meets the challenges of a changing climate.
Thursday the Fed will announced changes in the “covered funds” aspect of the Volcker Rule, he said, not in those provisions affecting proprietary trading.