DANVILLE (Virginia) • Having guided interest rates lower this year and declared a stopping point, Federal Reserve officials face a potentially volatile election-year problem if US job growth slows in the coming months as many expect it will.
The hurdle for further rate reductions has been set high, framed by chairman Jerome Powell as requiring a "material" shift in the country's economic outlook before the Fed would move again.
A downshift in monthly job growth on its own would not qualify, one Fed regional banker said on Tuesday, outlining how the Fed may be forced to explain in the midst of a likely intense presidential campaign why a slowdown in one of the country's most closely watched economic metrics is not necessarily a bad sign.
If the economy merely grows at trend, Richmond Fed president Thomas Barkin said, it would require job growth of perhaps only 100,000 per month, "and you'd have to deal with the complexity that those numbers are significantly below where they have been for some time... It will be hard for everyone to get their head around that being just fine".
Job growth during a more than decade-long expansion has routinely been above that level, and averaged 223,000 a month last year.
Fed officials and many economists have long expected monthly job growth to slow, a feeling heightened by an unemployment rate that has hit record lows and anecdotal reports from businesses that it is getting harder and taking longer to fill open positions.
Yet, US President Donald Trump is centring his re-election campaign on the performance of the economy. In a major speech in New York on Tuesday, he put job growth front and centre in remarks that also took aim at the Fed for not cutting rates faster.
"Remember we are actively competing with nations that openly cut interest rates so that many are now actually getting paid when they pay off their loan, known as negative interest. Who ever heard of such a thing?" Mr Trump said at the Economic Club of New York.
"Give me some of that. Give me some of that money. I want some of that money. Our Federal Reserve doesn't let us do it."
The fact that some European nations currently issue bonds at negative rates of interest is generally considered a product of the continent's economic weakness as much as its monetary policy.
Mr Powell was set to testify on Capitol Hill yesterday and today in public hearings, and may be asked to further explain where the Fed stands after a series of three rate reductions this year.
Those cuts were, in part, driven by a global economic slowdown linked to the Trump administration's trade war with China.
After the rate cut last month, officials signalled that they had likely taken out enough "insurance" against those trade-related risks.
Investors have largely bought into that idea, and have pushed out expectations of any further Fed action until at least late next year.
US central bankers at the last meeting said it would take evidence of a serious shock for them to go any further.
To Mr Barkin, that means it would be fine if the economy operated consistently with its underlying trends, even if that implies a slowdown from recent growth in jobs and gross domestic product.
"Something in and around trend for me would not be close to that hurdle" for a further rate reduction, Mr Barkin said in comments to Reuters following a workforce development conference here.
"It would have to be meaningfully below trend for me to believe you had to do more."
Ms Kathy Bostjancic, chief US financial economist at Oxford Economics, still expects a rate cut next year. "The bar's already set very high for them to cut rates," she said.
"We think that bar will be met", with a good chance economic growth slips below trend and prompts a response, she added.
"They try to stay out of the way of elections. But I don't think it would preclude them from acting," she said. "If they feel they need to reduce rates, they will."
REUTERS
