NEW YORK (NYTIMES) - Jerome H. Powell, the Federal Reserve chairman, kept future interest rate cuts squarely on the table on Friday (Aug 23) but suggested that the central bank was limited in its ability to counteract President Donald Trump's trade policies, which are stoking uncertainty and posing risks to the economic outlook.
Powell's remarks drew a swift and angry reaction from Trump, who equated the Fed leader with the president's adversary in the trade war, President Xi Jinping of China.
"My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?," Trump wrote in one of a series of Twitter posts.
The president's harsh response to Powell, a frequent target of Trump's ire, came after the Fed chair emphasised the limits of the central bank's ability to overcome economic uncertainty stemming from the president's trade war.
"While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade," said Powell, who spoke in Jackson, Wyoming, at the Federal Reserve Bank of Kansas City's annual symposium.
"Our challenge now is to do what monetary policy can do to sustain the expansion" to achieve the Fed's goals of low unemployment and stable inflation, he had said earlier in the speech.
Powell's remarks indicated that the Fed, which cut interest rates in July for the first time in a decade, remained willing to cut again in order to keep the economy growing.
But his reluctance to clarify the timing or size of any such move highlighted the central bank's predicament: Unemployment is low, and consumer spending is strong, but Trump's trade conflict is fuelling uncertainty, weighing on manufacturing and roiling markets. And the Fed is limited in its ability to resolve unpredictability.
"Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States," Powell said, adding that there were "no recent precedents to guide any policy response to the current situation."
His comments followed Beijing's announcement on Friday that China would retaliate against the Trump administration's next round of tariffs by increasing taxes on US$75 billion (S$100 billion) of US imports, including agricultural products, crude oil and cars.
Both countries plan to increase their levies in September and December, which could exacerbate the economic harm from a trade war that is already causing financial pain across the globe.
Powell noted that the period since the Fed's last meeting, on July 31, "have been eventful."
The day after that meeting, Trump announced that the United States would tax an additional US$300 billion in Chinese products.
Further evidence of a global slowdown has also emerged since then, and financial markets have reacted to the "complex, turbulent picture," Powell noted.
He said that policymakers were "carefully watching developments" as they assessed the implications for the economic outlook and monetary policy, and maintained an earlier pledge to "act as appropriate to sustain the expansion."
Against that backdrop, some members of the policy-setting Federal Open Market Committee support cutting rates to shore up economic growth, while others want to wait to monitor how the trade dispute plays out.
"Risk management enters our decision-making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy," Powell said.
Trump, who appointed Powell to a four-year term, has said that the Fed should use monetary policy to even the playing field with trading partners like China and Germany, which he believes are weakening their currencies and lowering rates to gain an economic advantage over the United States.
"Our Federal Reserve does not allow us to do what we must do," the president said in a tweet on Thursday, adding that Fed officials "move like quicksand. Fight or go home!"
Investors fully expect a rate cut in September and anticipate another before the end of the year, based on market pricing measured by the CME Group.
Fed officials often point to two mid-1990s rate-cutting cycles as rough templates for how the central bank is approaching policy now. In both instances, the Fed cut rates by 75 basis points to help get the economy through rough patches.
Powell referred to those episodes in his remarks Friday, noting that "the Fed was cutting, not raising, rates in the months before the end of the first two expansions in this era, and the ensuing recessions were mild by historical standards."
Speaking on Bloomberg Television on Friday, James Bullard, president of the Federal Reserve Bank of St Louis, called those instances a "great baseline" to reference for policy now, although he did not commit to matching their size.
"That's what they did in the 1990s," Bullard said. "I don't know where we'll end up."
The Fed is also contending with inflation that has run stubbornly below the 2 per cent level that the central bank views as consistent with a healthy economy. The need to return inflation to that goal quickly was one reason that the central bank cut rates in July.
While policymakers have historically set interest rates to keep extremely low unemployment from spurring faster inflation, Powell's remarks showed how that calculus is changing.
Powell noted that in the 1990s, the Fed was able to cut rates to support employment "without destabilising inflation."
At another point in the speech, he said that "low inflation seems to be the problem of this era, not high inflation."