–Fed Wants to ‘Use its Tools’ To Keep Expansion Going
By Denny Gulino
WASHINGTON (MaceNews) Market assumptions of a July 31 rate cut became even more entrenched Thursday with Federal Reserve Chairman Jerome Powell’s renewed assertion the central bank is ready to consider more accommodation in the face of signs of weakness elsewhere in the world.
Powell reinforced the already near universal expectation of a rate cut by reminding the Federal Open Market Committee has sent a signal that it is ready to move.
It was the second day of testimony on Capitol Hill for the chairman’s semiannual report to Congress, a chance, if he chose to use it, to lean against Wednesday’s headlines that he was hinting a rate cut is on the way.
Instead of emphasizing, as he did before the House Financial Services Committee, that there are many data points, including second-quarter GDP, to come before the next FOMC meeting, Powell’s emphasis at the Senate Banking Committee hearing was on the Fed’s readiness to step in.
“Central banks around the world are seeing weakness everywhere and they’re also providing more accommodation,” Powell said. “We’ve signaled we’re open to doing that.”
That Fed signal is helping hold down interest rates, having become “embedded in the interest rate curve,” he continued.
In May in the United States, “You saw business confidence surveys gapping out, quite negative, fairly broadly. It was a bit of a confidence shock,” he said.
“We addressed that through our policy and indicated at our last meeting that we were looking at changing rates.”
He said the “bottom line is that the economy is in a very good place and we want to use our tools to keep it there. It’s very important this expansion continue as long as possible.”
Apart from monetary policy, as on Wednesday on the House side of the Capitol. Powell Thursday was peppered with questions about the cryptocurrency being proposed by 29 companies led by social media giant Facebook, digital money named Libra. He said a government working group is just beginning to assess the regulatory challenges and probably won’t be done doing so even a year from now.
“I think we agree Libra raises a lot of serious concerns,” Powell said, “and those would include around privacy, money laundering, consumer protection, financial stability and those are going to have to be assessed and evaluated before this proceeds.”
One problem, though, is there is no one single regulator responsible for cryptocurrencies. “There isn’t any one agency that can stand up and have oversight,” he said, and the Fed doesn’t have formal jurisdiction.
Facebook’s reach around the world and the fact some of the participating backers of Libra are foreign entities have alarmed many lawmakers in a way that Bitcoin and its sibling digital currencies have not.
One senator worried that a worldwide payments system not tied to any central bank or government could somehow challenge the supremacy of the dollar, the world’s reserve currency.
Though Libra may or may not prove to be a threat, Powell warned that the privilege of having a dollar that stands alone, not subject to the vagaries of foreign exchange translation, should not be taken for granted. Ultimately reserve currency status depends on a sustainable fiscal policy which he says the U.S. does not have. Instead it borrows nearly a trillion dollars a year to spend on current consumption.
Without a competitor at present for reserve currency status, however, the dollar should reign supreme for a long time to come, but, he cautioned, not forever.
“Reserve currency does confer benefits and costs,” Powell said. It allows the U.S. to be “a little bit immune to market discipline.”
If the United States is going to retain the privilege, “You’ve got to run your fiscal house successfully,” Powell said. “You’ve got to run a sustainable fiscal policy – and we’re not.”