Federal Reserve Chairman Jerome Powell stuck to his view that interest rates are probably on hold after three straight reductions, while signaling that the U.S. central bank could resume cutting if the growth outlook falters.
“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” Powell told the congressional Joint Economic Committee Wednesday in Washington. “However, noteworthy risks to this outlook remain.”
Powell, whose comments largely echoed his message on Oct. 30 after the Fed’s third rate cut this year, said slowing global growth and trade developments pose “ongoing risks.” He added that persistently low inflation could lead to an “unwelcome” slide in the public’s longer-run expectations of inflation.
Powell said the Federal Open Market Committee cut the policy rate, which is now in a range of 1.5% to 1.75%, to support growth and move inflation back to the 2% target. He said the committee was prepared to respond to a “material reassessment” of its outlook, and the tone of his remarks suggest that downside risks for now outweigh the possibility of economic overheating.
Explaining why wages haven’t moved up with the unemployment rate at 3.6%, Powell said it could be a sign that there is still slack in the labor 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.”
The comments suggest that the rate cuts this year weren’t entirely about insuring against a global slowdown, but also recalibrating interest costs to an economy where inflation has remained stubbornly low.
“We continue to hear from him that they can run the economy with lower rates of unemployment than they thought they could,” said Michael Gapen, chief U.S. economist at Barclays Plc. “That underscores that they expect there to be a high bar to raising rates.”
Asked if he meant to signal that policy was on hold through next year, Powell responded, “I wouldn’t say that at all,” before repeating the line from his opening remarks on policy likely to remain appropriate as long as the economy stays on track.
“We do think monetary policy is in a good place, but we’re going to be watching very carefully incoming data,” he said.
Yields on 10-year Treasury notes were steady around 1.87% following the testimony while U.S. stocks were higher in New York trading.
Powell and the Fed have been relentlessly criticized by President Donald Trump, who has blamed the central bank’s policies, rather than the U.S.-China trade war, for a slowdown in the U.S. economy as he ramps up his 2020 re-election campaign.
“We’re paying actually high interest. We should be paying by far the lowest interest,” Trump said Tuesday in New York, complaining that by shunning the negative interest rates deployed by other central banks, the Fed “puts us at a competitive disadvantage.”
Powell told lawmakers that politics played no role whatsoever in the Fed’s policy decisions, which were based on the analysis of the data, adding that negative rates “would certainly not be appropriate in the current environment.”
U.S. economic data have continued to show strength among households and financial conditions have eased with stocks touching record highs on Wall Street this month.
Consumer sentiment improved for a third month in November, according to the University of Michigan’s preliminary sentiment index, while employers added 128,000 new jobs in October. 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 U.S. manufacturing signaled 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,” Powell said. “There is a lot to like about this rare place of the 11th year of an expansion and we’re certainly committed to doing what we can to extend it.”
– With assistance from William Edwards and Christopher Condon.