–Markets React With Disappointment as Rate-Cut Vision Challenged
–Powell Maintains Wait-and-See Stance; Says Softer Mfg ISM Still Seen Positive for GDP
By Denny Gulino
WASHINGTON (MaceNews) – The possibility of a rate cut any time soon seemed to be put off to the indefinite future Wednesday as Federal Reserve Chairman Jerome Powell said he and the rest of the Federal Open Market Committee anticipate inflation will not remain below target for very long.
In his news conference after the Federal Open Market Committee met expectations for no change in rates, Powell took several opportunities to point out how inflation can “move around” quarter to quarter and can possibly return to where it was last year, on target, relatively soon.
“We do see good reasons to think that some or all of the unexpected decrease (in core inflation) may wind up being transient,” Powell said. Only if the inflation undershoot was “persistent” would the Committee be concerned.
Powell looked at the middle of 2018 “when inflation was at 2% and appeared to be staying there,” and then, unexpectedly, core inflation turned soft in this year’s first quarter. “I don’t think it was related to anything we did in terms of raising rates” as the Fed did in December, he said. “Some of it does appear to be transient and idiosyncratic.”
“If inflation were to run persistently below 2% or persistently above 2% that would be a concern for the committee and the committee would take that into account in making policy,” he said, without explaining how long the FOMC would wait to see what happened before acting.
For markets having to revise or abandon visions of at least one future rate cut, Powell’s stance was a disappointment and so Treasuries and stocks reacted. The 30-year bond lurched down in yield with the FOMC’s afternoon statement while the front end of the yield curve moved up. The Dow saw a swing of more than 200 points, losing its positive lean to end down 162 points.
The streamlined FOMC statement reflected no concerns about geopolitical conditions and Powell acknowledged that risks have moderated, including China trade tensions. Non-economic “other factors,” presumably including President Donald Trump’s call this week for a full percentage point rate cut, were not discussed, Powell said.
Powell even placed the Fed’s serene view of inflation’s path in a global context, saying the Fed is not alone in having difficulty hitting its target. “Many major central banks have struggled to reach their inflation goals,” he said, and the Fed “has come closer, I think, than most others.”
Disinflationary forces are global, including aging populations creating “significant challenges.” So “interest rates will be lower,” he said.
The FOMC had its quarterly briefing on financial stability vulnerabilities during this latest meeting and found none of them a big concern at this point, he said.
“My outlook is a positive one, is a healthy one, for the U.S. economy, for growth for the rest of this year and I would say that the basis for that really is consumer spending and business investment,” Powell said. “You saw stronger retail sales, stronger motor vehicle sales in March and, as I mentioned, the conditions, the broader economic fundamentals are strong in support of consumer spending.”
Business investment should also be positive. The “resolution of uncertainty” about trade would also be a positive. “Most of the gains that I would expect, even from a successful trade negotiation, would come in over time. It wouldn’t be the kind of thing where you would immediately feel big effects right away but they could be quite important over a longer period,” and “that would be my expectation,” he said.
On portfolio management, Powell said there is no rush to make policy final. Meanwhile, “there is no template for this” and the FOMC is only gradually making changes. “Effective, I guess, today we’re cutting the rolloff rate for Treasuries in half just because we want to take our time and move gradually,” he said.
Wages are moving up consistent with the growth of productivity, not fast enough to suggest any overheating of the economy, he said. The biggest part of the gains have been in the lowest end of compensation “which is kind of a welcome thing.” Last year’s productivity growth was 1.9%, “much higher” than several years since the financial crisis. “I don’t know if that level can be sustained,” Powell said.