Federal Reserve Chair Jerome Powell was bullish on the US economy in his annual testimony to the Joint Economic Committee of Congress on Wednesday, leading him to reaffirm his earlier suggestions that Fed policymakers are done making any changes in monetary policy for now.
“My colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2% objective as most likely,” he said before the committee, an odd-duck panel with members from both the Senate and the House of Representatives.
Moreover, the full impact of the central bank’s recent monetary policy actions has yet to be felt. The whole point of the three successive quarter-point reductions was to buoy an economy which has been expanding for more than 10 years. “We see the current stance of monetary policy as likely to remain appropriate,” he said, barring data that suggests the economy is not chugging along as they expect.
One committee member tried to plumb just how long that stance will last, by asking whether Powell meant the Fed wouldn’t tinker with interest rates all over the coming year. “I wouldn’t say that at all,” Powell said.
But not anytime soon. Nobody expects any action at the Fed’s last meeting of the year next month, and in fact trading in Fed funds futures indicates a preponderance of views that no further rate changes can be expected until well into the second half of 2020.
Trade Uncertainty Continues To Weigh, But Inflation Not A Worry
Powell acknowledged that trade uncertainty continues to weigh on business confidence and investment. Likewise, sluggish growth abroad could become a brake on U.S. growth. Policymakers will be scrutinizing incoming data for any signs of significant slowdown.
What they’re not worried about is inflation. While Powell still considers inflation close to the Fed target of 2%, it has become clear that historic models of the relationship between prices and job-market slack no longer seem to apply.
The Fed used to consider a 5% jobless rate as nearly full employment, but now economists must acknowledge the U.S. economy can operate at a far lower level of unemployment. Policymakers no longer can say just what maximum employment is, Powell said, adding that they need to have “significant humility” in making estimates.
This kind of conundrum makes it a good moment to review how the Fed conducts monetary policy, he suggested. A fundamental examination of goals and tools is going on and this discussion will be part of the minutes of each policy meeting, which are released with a three-week delay.
Tough To Compete With Yesterday's House Impeachment Hearings
The real action in Congress on Wednesday was elsewhere, of course. The House Permanent Select Committee on Intelligence under the chairmanship of California Democrat Adam Schiff held its first public hearings on whether President Donald Trump’s actions on Ukraine aid merit impeachment and removal from office.
Powell could hardly compete with that, and all he could say was that politics would play no role in Fed policymaking.
The Fed chairman, who will testify on Thursday before the House budget committee, did take time to urge Congress to take action on the federal deficit and debt, which are growing at a rate he called “unsustainable.” The worry is that when a downturn does come and fiscal action is needed to stabilize the economy, Congress will feel limited in what it can do, Powell said.