Powell Says Fed Prepared to Act to Sustain Expansion; Acknowledges Limited Monetary Policy Tools

“We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives,” he added.
James Hyerczyk
Fed Chair Jerome Powell

In a highly anticipated speech on Friday, Federal Reserve Chairman told global investors the Fed is prepared to act to sustain the more than ten year recovery. Powell said the Fed stands ready to do whatever it takes to support the record-long U.S. economic expansion, while stating that international developments are weighing most heavily on the Fed’s decisions.

Powell also acknowledged Fed policymakers have a limited toolbox in how it can respond to an ongoing trade war with China, noting that monetary policy is a “powerful” but not universal tool.

“Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion,” Powell said at the central banker symposium in Jackson Hole, Wyoming, early Friday morning. He further added, “It will at times be appropriate for us to tilt policy one way or the other because of prominent risks.”

Nonetheless, the Fed chief provided no clear indication of whether the Fed plans to meet the market’s demand for a 25-basis point rate cut in September and as many as four more over the next 12 months in an effort to continue the expansion and defend the U.S. against a recession.

Powell also said uncertainty caused by Trump’s tariffs on China and other trading partners is the major risks the Fed is monitoring. He also acknowledged that since the Fed’s first rate cut in ten years on July 31, market conditions “have been eventful, beginning with the announcement of new tariffs on imports from China,” he said.

“We have seen further evidence of a global slowdown, notably in Germany and China,” Powell said. “Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government…Long term bond rates around the world have moved down sharply to near post-crisis lows.”

Powell also acknowledged the strength of the U.S. economy and “this historically strong job market” amid the dark cloud of recession predictions.

“Thus, after a decade of progress toward maximum employment and price stability, the economy is close to both goals,” he said.

“The key question raised by this era, then, is how we can best support maximum employment and price stability in a world with a low neutral interest rate,” Powell said.

“But fitting trade policy uncertainty into this framework is a new challenge,” Powell said. “There are… no recent precedents to guide any policy response to the current situation. Moreover, 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.”

“We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives,” he added.

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