Powell’s Press Conference

January 30, 2019

Fed Chairman Powell’s press conference reinforced the significant change in monetary policy forward guidance contained in the formal statement released today by the Federal Open Market Committee. He declined to agree that the current hold on further near-term changes in the federal funds target is merely a “pause in a tightening cycle,” conceding instead that only time will indicate if that in fact proves to be the case. Nor would he put a timeline this new period of patiently watching incoming economic and financial market data before making fresh policy decision. For now, Powell speaking for the FOMC believes that the Fed’s current stance is appropriate. He confirmed that policymakers’ baseline view of the most likely U.S. growth and inflation outlook hasn’t changed since theĀ  previous meeting six weeks ago.

So what has changed? Actually two related things. The first is the proliferation of many cross-current factors that are augmenting the range of possible future outcomes. The risks to growth and inflation of these cross currents are skewed to the downside, and frankly it may be quite a while longer before their impact can be sorted. In the meantime, a second change is allowing Fed officials greater time to put the cycle of rate tightening indefinitely on hold, and that is a lessening danger of getting too high inflation in the future. Oil prices have fallen and market-based measures of inflation compensation have moved lower.

President Trump’s repeated criticisms of Fed policy and Chairman Powell have put Mr. Powell into an awkward spot. Central bank policy is only effective if considered by markets and the public to be independent of political meddling, and Powell in Q&A had to defend more than once questions that today’s shift was not a reaction to Trump’s complaints but rather a natural response by FOMC officials to changing circumstances regarding the most appropriate policy for the Fed to follow. By having to proclaim the obvious, that monetary policy is always designed to do what’s best for the American people by using incomplete and imperfect information to best meet the central bank’s dual mandate as stipulated by Congress.

Ironically, many but not all of the cross-currents are of President Trump’s own making. The government shut down because he thought that would force congress to pass a budget with $5.7 billion of funding for a Mexican border wall, and the threat of a resumed shutdown after mid-February remains. Trade frictions with China, Germany and anybody else with a surplus vis-a-vis the United States stem from the Trump Administrations preference for using the threat of tariffs. U.S. traditional allies are less inclined to work cooperatively with Washington to solve shared global economic problems because President Trump no longer treats them as allies. The possible use of U.S. fiscal policy as a counter-cyclical tool in the next recession has been neutered by President Trump’s tax cut of December 2017 that put the federal deficit on an unsustainable long-term path, while also further skewing the wealth and income disequilibrium that in and of itself weakens U.S. potential GDP growth. So do the anti-immigration policies of the administration and cutbacks in policy support for education and research and development in 21st century technologies. One might even argue that a hard Brexit, which Powell said Fed officials hope can be avoided, has been encouraged by President Trump’s past comments about that issue.

An additional statement was released today and much of the press conference, both Powell’s introductory remarks and in Q&A, addressed some further clarification of the policy toward the central bank’s balance sheet. No decisions have been finalized, but it appears that there will be a change in the current pace of that process and that a higher ultimate level of banking reserves will be allowed. The fed funds rate remains the sole operative tool of monetary policy for now, but Fed officials have not ruled out using unconventional quantitative tools if needed sometime in the future. A better understanding of how many reserves banks really need suggests that the balance sheet ought to be left higher than thought previously and that the time interval during which some asset holdings will not be reinvested may prove shorter.

Markets this afternoon reacted in ways consistent with the shift in Fed forward guidance. The dollar fell, gold rose, long-term interest rates eased, and most dramatically, share prices rallied.

Copyright 2019, Larry Greenberg. All rights reserved. No secondary distribution without express permission.



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