Though Federal Reserve Chair Jerome Powell blamed President Donald Trump's trade policy for economic headwinds that he says the central bank can do little to affect, the gist of his remarks on Friday baked in September’s quarter-point rate cut as was widely expected by investors.
“While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rulebook for international trade,” Powell said at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. Markets seemed to agree.
Stocks plunged later in the day after Trump threatened further action against China. But that doesn’t mean investors are going to let the Fed off the hook.
Two-thirds of investors in Fed funds futures expect at least a further quarter-point cut in October after the expected quarter-point reduction in September. And Powell isn’t doing anything to discourage that speculation. “We will act as appropriate to sustain the expansion,” Powell said after his disclaimer about the limits of what monetary policy can do.
No one, of course, holds the Fed responsible for the trade war with China, nor for the growing prospect of a no-deal Brexit, the economic slowdown in China and Germany, the riots in Hong Kong, or the collapse of the Italian government in the litany of economic ills cited by Powell. But his moaning about this and that seemed designed more to keep the Fed from being scapegoated by Trump, who nonetheless kept up his attack on Fed policy on Friday, wondering on Twitter whether Powell or Chinese leader Xi Jinping is the greater enemy of the U.S. economy.
Even if the Fed’s role is reactive, it has to respond to these macro events, and Powell doesn’t shirk that responsibility. “Committee participants have generally reacted to these developments and the risks they pose by shifting down their projections of the appropriate Federal funds rate path,” Powell said.
“Along with July's rate cut, the shifts in the anticipated path of policy have eased financial conditions and help explain why the outlook for inflation and employment remains largely favorable.”
The July meeting did not include the quarterly projection materials, including the dot-plot graph of forecasts for the Federal funds rate, but June already showed a sharp reduction from March, with nearly half the participants expecting a further cut to 1.75-2.00 before the end of the year.
That graph is almost certain to show an additional lowering of expectations by September, perhaps matching markets’ slightly lower than even predictions of two more cuts, to 1.50-1.75 by the end of the year.
Some of the hawks on the Federal Open Market Committee (FOMC) have been staking out their resistance to further cuts. Cleveland Fed chief Loretta Mester said on the sidelines of the Jackson Hole conference that she thinks interest rates are at about the right level now. She is not a voting member of the panel this year, but she said she opposed the July rate cut along with the two dissenting regional chiefs, Esther George of Kansas City and Eric Rosengren of Boston.
George and Philadelphia Fed chief Patrick Harker also expressed resistance to further cuts (Harker is a nonvoter this year). Dallas Fed chief Robert Kaplan, who is not a voter, sat on the fence, saying he would prefer not to cut in September but would keep an open mind. St. Louis Fed president James Bullard, who is a voter and goes back and forth on cuts, said the inverted yield curve is not a good place to be and indicates a cut in the benchmark rate.
Not that any of this really matters. Powell seems set on a cut and he will have the five-member board of governors and New York Fed chief John Williams behind him, and evidently Bullard’s vote as well.
After that, the bottom line is that the Fed has to play ball if the economy stutters for whatever reason. Beyond Powell’s stop-and-go comments or the feelings of regional chiefs, this is what investors are focusing on.