Federal Reserve Chairman Jerome Powell made a statement on Tuesday to say that the central bank would monitor economic conditions and act to maintain the current economic expansion which is near-record breaking.
- Powell spoke in Chicago to say that the outcome of the trade war and other concerning economic headwinds is unclear.
- His statements were relatively broad and in keeping with previous statements regarding the Fed’s flexibility to monetary policy.
- He pointed to the possibility of a recession on the way.
It’s possible that Powell has deliberately kept recent statements vague following criticisms that his remarks had been causing major ripples in the stock market last year. His latest appearance saw him focus on the issue of the trade war, although he also pointed out that government bond yields were behaving in a way consistent with recessionary indicators.
“We do not know how or when these issues will be resolved,” said Powell. “We are closely monitoring the implications of these developments for the U.S. economic outlook and, as always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”
Powell did not comment on the controversial issue of potential rate cuts. While markets are expecting two cuts this year, Fed officials have said that there is no need for a cut. Minutes from the latest FOMC committee meeting show that the committee is taking a patient approach to monetary policy as promised.
Powell pointed out that the low rate environment currently leaves a very small margin within which the Fed can operate before hitting the zero lower bound, the point where the benchmark rate of interest can’t go much lower.
“In short, the proximity of interest rates to the ELB has become the preeminent monetary policy challenge of our time, tainting all manner of issues with ELB risk and imbuing many old challenges with greater significance,” he said.
The Fed faces a problem with inflation, which has yet to sustain at the central bank’s 2% goal. Powell said persistently low inflation could lead to “a difficult-to-arrest downward drift” in expectations.
Powell said the Fed will continue to use tools like near-zero rates and asset purchases when necessary.
“Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis. We know that tools like these are likely to be needed in some form in future ELB spells, which we hope will be rare,” he said.
Powell essentially says the dot plot doesn't work very well in very uncertain times (like the one at the Fed's meeting in two weeks) pic.twitter.com/ifQ7U2NTQy
— Nick Timiraos (@NickTimiraos) June 4, 2019
Royce Mendes, senior economist at CIBC Capital Markets, said that the comments from Powell could be viewed as indicative of a rate cut.
"Since the last Fed meeting on May 1st, trade tensions have increased, causing concern among many officials that the outlook could warrant a rate cut if economic data deteriorate as well," he said.
”Today's commitment from Powell is the strongest indication that his level of concern has increased in recent weeks. The speech only devotes one paragraph to the current situation, with the rest focused on Fed's strategy, tools and communications. Still, it was enough to see yields fall after the text was released."
Spot gold price spiked briefly following comments made by Powell, but has seen little lasting reaction to the news, currently trading at $1,321.43/oz and down 0.10% with a high of $1,329.02/oz and a low of $1,320.69/oz.