Fed chief satisfied with current US interest rates but flags risks

US Federal Reserve chairman Jerome Powell signalled that interest rate cuts could resume if the outlook falters.
US Federal Reserve chairman Jerome Powell signalled that interest rate cuts could resume if the outlook falters.

He says slowing growth, trade issues could lead to reassessment

WASHINGTON • United States Federal Reserve chairman Jerome Powell stuck to his view that interest rates are probably on hold after three reductions, while signalling that cuts could resume if the growth outlook falters.

"We see the current stance of monetary policy as likely to remain appropriate as long as information about the economy remains broadly consistent with our outlook," he told the congressional Joint Economic Committee in Washington on Wednesday.

"However, noteworthy risks to this outlook remain."

Mr Powell said slowing global growth and trade issues pose "ongoing risks". He added that the Federal Open Market Committee cut interest rates, which are now in a range of 1.5 per cent to 1.75 per cent, to support growth and move inflation back to the 2 per cent target.

He said it was prepared to respond to a "material reassessment" of its outlook, and the tone of his remarks suggests that downside risks for now outweigh the possibility of economic overheating.

Mr Powell also addressed why wages have not moved up with the unemployment rate at 3.6 per cent.

He said it could be a sign that there is still slack in the labour market. "It also may be that the neutral rate of interest is lower than we have been thinking and that therefore our policy is less accommodative than we have been thinking. We are letting the data speak to us."

His comments suggest the rate cuts this year were not entirely about insuring against a global slowdown, but also recalibrating interest costs to an economy where inflation has remained stubbornly low.

Asked if he meant to signal that monetary policy was on hold next year, Mr Powell said "I wouldn't say that at all", before repeating the line on policy being likely to remain appropriate as long as the economy stays on track. "We do think monetary policy is in a good place, but we are going to be watching very carefully incoming data."

Yields on 10-year Treasury notes were steady at around 1.87 per cent following the testimony, while US stocks were higher.

Mr Powell and the Fed have been relentlessly criticised by President Donald Trump, who has blamed the central bank's policies, rather than the US-China trade war, for a slowdown in the economy.

"We are paying high interest. We should be paying by far the lowest interest," Mr Trump said on Tuesday, adding that by shunning the negative interest rates imposed by other central banks, the Fed "puts us at a competitive disadvantage".

Mr Powell told lawmakers that politics played no role whatsoever in the Fed's policy decisions, which were based on data analysis. He added that negative rates "would certainly not be appropriate in the current environment".

US economic data has continued to show strength among households, and financial conditions have eased with stocks touching record highs on Wall Street this month.

This month was the third month of improvement in consumer sentiment, while firms added 128,000 new jobs last month. Mr Powell said the Fed expected some easing in the pace of job gains after last year's strong pace.

Manufacturing and business investment continue to lag. A gauge of manufacturing signalled that the sector contracted for a third straight month, with the weakest production level since the last recession.

"The outlook is still a positive one. There is no reason this expansion can't continue," Mr Powell said.

"There is a lot to like about this rare place of the 11th year of an expansion, and we are certainly committed to doing what we can to extend it."

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A version of this article appeared in the print edition of The Straits Times on November 15, 2019, with the headline 'Fed chief satisfied with current US interest rates but flags risks'. Print Edition | Subscribe