–‘Committed to Using Our Tools’ to Keep Expansion Going
By Denny Gulino
WASHINGTON (MaceNews) – Federal Reserve Chairman Jerome Powell came to Capitol Hill Wednesday to emphasize those cross currents of uncertainty still “weigh on the economy” and while never uttering the words “insurance” or “rate cut,” he repeated how important he feels it is to keep the economic expansion going.
Powell, delivering the first of two installments of his mid-year report to Congress, told the House Financial Services Committee that policymakers are concerned with “slowing growth around the world,” particularly in manufacturing. They are also concerned that inflation not keep running below 2% .
Otherwise, “Fortunately, the consumer part of the economy is doing very well,” he said.
With a studied balance, however, Powell stopped short of giving rate cutters or those who feel they are unnecessary any firm signal, saying another quarterly GDP report and several other data points will be delivered before the next Federal Open Market Committee meeting at the end of the month, all to be carefully considered before any decision is reached.
As the CME Fedwatch Tool indicates, market participants have long since made their own decision, seeing a 100% possibility of FOMC action to cut rates July 31 with the only question whether it will be by 25 or 50 basis points.
The economy is “solid,” Powell said, which could be construed as an argument against cutting rates, and he also stressed that it’s important to keep the expansion going, which could be construed as an argument in favor of a so-called insurance rate cut.
“We are in the 11th year of an expansion, that’s a first,” he continued. “We’re at 3.7% unemployment. That’s a 50-year low – a 50-year low for 15 months. There’s no reason that can’t continue.”
Traders concentrating on finding at least a few Powell words to trigger some action, did react briefly when the Fed chairman said of the expansion, “We are committed to using our tools to make sure” that it doesn’t end.
“And,” he added, “I would just again point out this expansion is now reaching groups that hadn’t been reached in the first few years … all the more reason why it’s so important to keep this expansion going.”
The minutes of the June FOMC meeting, published less than an hour after Powell stopped testifying, underlined the sentiment for rate cuts in terms more explicit than he used.
“Several participants noted,” the minutes said, “that a near-term cut in the target range for the federal funds rate could help cushion the effects of possible future adverse shocks to the economy and, hence, was appropriate policy from a risk-management perspective.”
Powell took the opportunity to warn that not raising the debt ceiling is “unthinkable,” and should Congress not break what appears to be an intensifying impasse on both the ceiling and the government’s operating budget the “loss of confidence would be substantial.”
Congress will inevitably become more preoccupied with fiscal policy, with a budget or a continuing resolution necessary by September 30, and a new ceiling for Treasury borrowing which might be necessary even sooner. Failure to agree on either in time would threaten another government shutdown.
Powell said he “absolutely” agreed with Rep. Alexandria Ocasio-Cortez who asked if it was correct that the Fed’s estimates in years past of the natural rate of unemployment had been too high. He said the Fed experts are spending a “great deal of time” thinking about how the relationship between the unemployment rate, wage inflation and other old Phillips Curve axioms have changed.
Now the low 3.7% unemployment rate appears “well within the range” assumed for the economy’s equilibrium rate of unemployment which does not accelerate wages beyond the rate of productivity growth, he said.
In another exchange, Powell disputed the notion that employment is running “hot,” saying he doesn’t see any “heat” from accelerating wage inflation. He said it is “very interesting” and the subject of much discussion why there isn’t the kind of acceleration in wages caused by competition for labor that economic theory would expect.
Aside from a February spurt to 3.4% over-the-year growth, wages as measured in the monthly jobs report have through June been capped at 3.1% to 3.2% this year despite repeated predictions they were headed higher faster.
A recurring topic among committee questioners was the announced crypto currency Libra that Facebook is working to debut. Powell, usually dismissive of any systemic threats from Bitcoin and other digital currencies, did acknowledge that Facebook’s immense size made Libra a subject much more interesting to the Fed from a safety and soundness standpoint. While not wanting to stifle innovation, Powell said the Fed still has many questions about Facebook’s project.
California Democrat Brad Sherman, an avowed enemy of all cryptocurrencies, said he wants to question Facebook founder Mark Zuckerberg about it when he appears before the committee. Meanwhile he said he sees the social media network that is accused of violating the privacy of its users devising a medium of exchange that seems intended to protect the privacy of terrorists and drug dealers.
Powell again said that if President Donald Trump asked him to quit he would say “no,” but instead of elaborating he repeated that the Fed is focused on full employment and stable prices, not politics.
Asked for his opinion of the gold standard, he cautioned that he was not commenting on the views of Judy Shelton, a Trump adviser and proposed nominee to the Fed board who in the past has seen some merit in the yellow metal. No, Powell said he would not favor a return to the gold standard that he pointed out has been abandoned by every other country as did the U.S. in 1971 and which would eliminate the Fed’s current mandates.
Powell will face more questions Thursday when he appears before the Senate Banking Committee.