–‘We Will Act as Appropriate’ to Sustain Expansion
By Denny Gulino
CHICAGO (MaceNews) – In a major announcement Tuesday, Federal Reserve Chairman Jerome Powell made the “Fed put” explicit, saying, “We will act as appropriate to sustain the expansion” in case of trade negotiation turbulence.
He is making the remarks at a Chicago Fed conference at which all the members of the FOMC are in attendance, and other top policy makers as well.
In his prepared remarks Powell said, “The proximity of interest rates to the ‘effective lower bound’ has become the preeminent monetary policy challenge of our time, tainting all manner of issues with effective lower bound risk and imbuing many old challenges with greater significance.”
The most important question, he continued, “may be about how the entral bank will respond to the unexpected rather than what it will do if there are no surprises.”
Powell’s surprisingly direct comments seemed to fulfill the fondest hopes of market participants for a Fed that both acknowledged the effect of trade negotiations and coupled that with the promise to act if necessary to sustain the expansion.
The Fed chairman’s key remarks were showcased at the very top of his speech to the Chicago Fed’s on “Monetary Policy Strategy, Tools and Communication Practices, “ the latest in a special series of “Fed Listens” events featuring a wide variety of speakers, most from outside the Fed system. In seven sessions, three dozen speakers other than Fed Board members are part of the program.
Powell stuck to the script of his prepared remarks, beginning the second paragraph by saying, “I’d like first to say a word about recent developments involving trade negotiations and other matters.” The Fed, he said, does “not know how or when these issues will be resolved. We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”
He emphasized the Fed is poised to react in the short term. “In this environment, the most important policy message may be about how the central bank will respond to the unexpected rather than what it will do if there are no surprises,” he said.
“Unfortunately,” he continued, “at times the dot plot has distracted attention from the more important topic of how the FOMC will react to unexpected economic developments.” He added, “In times of high uncertainty, the median dot might best be thought of as the least unlikely outcome.”
In the audience were other FOMC members, including Clarida who is tasked with managing the conference. The “Fed Listens” series of seven conferences have required the presence of all available top Fed policy makers.
Powell reminded that in 1999 the Fed held a conference on “Monetary Policy in a Low Inflation Environment” which was described in the press at the time as an “odd” subject. At that time, Powell said, “Even though the Bank of Japan was grappling with the effective lower bound as the conference met, the issue seemed remote for the United States.”
But, participants then “could not have anticipated that only 10 years later, the world would be engulfed in a deep financial crisis, with unemployment souring and central banks around the world making extensive use of new strategies, tools and ways to communicate.”
At the time of that 1999 conference the expansion was eight years old and the unemployment rate was 4.1%, which Powell pointed out was “not so different from today.”
However, he said, “The big difference between then and now is that the federal funds rate was 5.2% – which to underscore the point, put the rate 20 quarter-point rate cuts away from the effective lower bound.”
In the years since, “Inflation has become much less sensitive to tightness in resource utilization.” That can both be a blessing “in avoiding deflation when unemployment is high but it means that much greater labor market tightness may ultimately be required to bring inflation back to target in a recovery.”
“In short, the proximity of interest rates to the effective lower bound has become the preeminent monetary policy challenge of our time, tainting all manner of issues with effective-lower-bound risk and imbuing many old challenges with greater significance,” Powell said.
He concluded by saying, “We have been living in times characterized by large, frequent, unexpected changes in the underlying structure of the economy.” In that context, the Fed’s capacity “to respond to the unexpected” become paramount.