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Sunday, 17 November 2019

Fed chair warns Congress that US deficit ‘unsustainable’ in case of any downturn (FT)

Financial Times title: Jay Powell sees little reason for December rate cut in rebuff to Trump

FT subtitle: Fed chair warns Congress that US deficit ‘unsustainable’ in case of any downturn

Date of publication: 14 November 2019

“Federal Reserve chairman Jay Powell told US lawmakers on Wednesday that he sees little reason to lower interest rates in December, despite coming under renewed pressure from President Donald Trump to loosen monetary policy.

Speaking to the US Senate’s joint economic committee, Mr Powell said the current stance of monetary policy would probably remain appropriate “as long as incoming information about the economy remains broadly consistent with our outlook”.

Mr Powell also reminded lawmakers that if a downturn were to come, government spending would be an important policy tool, for which Congress has responsibility. But he warned that the federal deficit was “unsustainable” and could make it difficult for Congress to act.

The remarks suggest that the central bank’s outlook has not changed since its last monetary policy meeting in October and that the Fed’s rate-setting committee is likely to leave its interest rate target range unchanged at 1.5 to 1.75 per cent in December, when it next meets.

The Fed has lowered its policy rate by 75 basis points this year. Mr Powell has described the cuts as a response to low inflation and the uncertainty over trade that was holding down global growth and US business investment.

But at its October meeting, the Fed’s Open Market Committee hinted strongly that it would pause before making any more changes, to monitor economic data as it waited for the cuts to take effect. Market bets on future Fed policy rates compiled by CME Group show investors do not expect the Fed to change rates in December.

The publication of Mr Powell’s testimony looked unlikely to change that expectation and generated only a muted reaction in financial markets. US Treasuries pared back some of their earlier gains, while the equity benchmark S&P 500 was up just 0.1 per cent as the testimony ended.

Mr Powell once again disappointed Mr Trump, who in a speech in New York on Tuesday asked the Fed to compete with more aggressively with negative interest rates offered in Europe and Japan.

“Give me some of that money,” the president said in New York. “I want some of that money. Our Federal Reserve doesn’t let us do that.”

Asked directly on Wednesday about negative interest rates in the US, Mr Powell said that very low or negative rates would “certainly not be appropriate in the current environment”, explaining that negative rates were a better fit for economies with low inflation and low growth.

Mr Powell described a US economy in its 11th year of expansion, with an outlook that “remains favourable”.

“It’s been a long slow recovery, but it’s come a long way,” adding that there was no reason the expansion could not continue.

As he has in the past, he pointed out that an extended run of low unemployment had encouraged people to return to the workforce, and that the strongest wage gains were going to the lowest-paid workers.

He also suggested that it was possible that labour conditions could continue to improve from here. The Fed has adopted an explicit inflation target of 2 per cent; it does not have a similar target for unemployment.

“What we continue to learn is that the US economy can operate at a much lower level of unemployment that many would have thought”, he said. “I’m very open to the idea that we don’t know where maximum employment precisely is”.

Mr Powell also offered what for a Fed chair was a strong warning about the state of the nation’s finances. The US federal debt is “on an unsustainable path, with high and rising debt”, he said. “Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn.”

Interest rates had been dropping for decades, he said, reflecting both more saving as populations aged, and the central bank's success in bringing inflation down.

“The fact that interest rates are lower does mean that we will pay less in interest,” he said. “It does not mean that we can ignore deficits at all.” "


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