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Powell Keeps Rate Cut Expectations Intact

Karl Schamotta September 6, 2019

In his last public comments before the September 17-18 meeting, Federal Reserve Chairman Jerome Powell said that the central bank is monitoring “significant risks”, but a strong labour market and solid consumer spending should help the American economy avoid recession.

In response to a number of a pointed questions at a conference in Zurich, Powell took pains to emphasise the Fed’s apolitical nature, saying “Political factors play absolutely no role in our process” and that he and his colleagues “would not tolerate” the integration of political perspectives within the bank’s monetary policy framework.

He further added that it is not the Fed’s job to comment on trade policy, but said, “Uncertainty around trade policy is causing some companies to pull back now” – which is challenging because “trade policy uncertainty is “not something central banks have a lot of practice in dealing with”. As such, “we need a huge dose of common sense and risk management” when making monetary policy decisions.

Rising insecurity has led to weakness in manufacturing and business investment, with data coming in “sideways to slightly down”, but the US labor market continues to tighten, and the consumer is in “good shape”.

He emphasized his institution’s relatively-optimistic view on the economy in the near term, saying, “we are not forecasting or expecting a recession” in the United States, or globally.

Powell did sound a warning for the future however, saying that the world has transitioned toward a new macroeconomic state characterized by “slower growth, lower inflation, and lower interest rates”. In this environment, “central banks will have less ability to counteract a downturn by cutting rates” and may have to consider unconventional tools – like forward guidance and asset purchases, with all their imperfections – in order to defend their inflation targets.

And of course – surprising absolutely no one – he said that the Fed will “continue to act as appropriate to sustain the expansion.”

The dollar snapped back, recovering some of this morning’s losses during Powell’s comments – but with equity markets rising and risk appetite improving, appears to be losing momentum again as we go to pixels.

Taken in sum, Powell’s comments support previously-articulated views on the need for a “mid-cycle adjustment” in interest rates – a series of cuts that provide insurance against a downturn without provoking alarm about the future. With expectations for a move at the next meeting remaining intact, and the “Powell put” unexpired, markets can head into the weekend (or more accurately, to the pub) breathing easy once again.

Karl Schamotta
Chief Market Strategist

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