Jay Powell links Federal Reserve’s dovish tilt to ‘global factors’
Jay Powell, the Federal Reserve chairman, sent his latest signal that the US central bank is considering an easing of monetary policy to offset mounting trade tensions and softness in the world economy, stressing that “global factors” had become more relevant to policymaking in recent years.
Speaking at a conference in Paris ahead of a meeting of G7 finance ministers and central bank governors, Mr Powell said the Fed would “act as appropriate to sustain the expansion” in the face of increasing “uncertainties” about the US outlook — reinforcing expectations of an interest-rate cut of at least 25 basis points this month.
Although the US unemployment is at historically low levels, and consumer spending has remained strong this year, Fed officials have grown increasingly nervous about persistently low-inflation readings, and weakness in some manufacturing data.
More importantly, they have placed huge emphasis on the threat to the US economy posed by the flagging global outlook as a rationale for moving ahead with an “insurance” interest rate cut — with Mr Powell noting that policymakers had grown “more keenly aware” of the international environment over the past decade.
“The global nature of the financial crisis and the channels through which it spread sharply highlight the interconnectedness of our economic, financial and policy environments. US economic developments affect the rest of the world, and the reverse is also true,” he said.
“We have seen how monetary policy in one country can influence economic and financial conditions in others through financial markets, trade and confidence channels. Pursuing our domestic mandates in this new world requires that we understand the anticipated effects of these interconnections and incorporate them into our policy decision making.”
Mr Powell has faced criticism from some economists and investors for moving towards possible rate cuts without a more obvious deterioration in hard economic indicators — ditching the Fed’s traditional dependence on data for policy decisions for a more nebulous assessment of risks.
But the Fed chairman’s speech in Paris stressed how different the world has become, pointing in particular to persistently low inflation as a key source of concern. At the moment the Fed’s preferred inflation measure — the core PCE price index — is growing at a rate of 1.7 per cent annually, below the central bank’s target of 2 per cent. Mr Powell said several factors were behind this trend — from demographics to globalisation, low productivity, higher demand for safe assets, and weaker links between inflation and joblessness — and they were expected to persist.
“If that happens, the neutral rate of interest will remain low, and policymakers will continue to operate in an environment in which the risk of hitting the effective lower bound is much higher than before the crisis,” Mr Powell said, noting that this “poses new complications for central banks and calls for new ideas”.