New York: Federal Reserve Chairman Jerome Powell suggested that the central bank has room to ease monetary policy as the tie between the inflation and jobless rates has broken down.
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“The relationship between unemployment and inflation became weak” about twenty years ago, Powell told the Senate Banking Committee Thursday. “It’s become weaker and weaker and weaker.”
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The Fed chief stressed at his second day of congressional testimony that the US economy is “in a very good place.” He said the central bank wants “to use our tools to keep it there,” and offset weakness stemming from a global slump in manufacturing and business confidence linked to trade tensions.
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“He sent a pretty straightforward signal that they intend to lower interest rates,” said Ward McCarthy, chief financial economist at Jefferies LLC.
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Neutral rate
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Powell told Senators that the so-called “neutral rate,” or policy rate that keeps the economy on an even keel, is lower than past estimates have put it — meaning monetary policy has been too restrictive.
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“We’re learning that interest rates — that the neutral interest rate — is lower than we had thought and I think we’re learning that the natural rate of unemployment is lower than we thought,” he said. “So monetary policy hasn’t been as accommodative as we had thought.”
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Federal Reserve officials in fact marked down their estimate of the longer-run policy rate to 2.5 per cent in June, from 2.8 per cent in March.
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Investors fully expect a quarter-point cut at the Fed’s July 30-31 gathering, according to pricing in interest-rate futures, though odds were dialled back a bit after a stronger-than-expected US inflation report earlier on Thursday.
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At the hearing, Powell received bipartisan support for his independence at a time when the Trump administration is openly attacking the policies of the Federal Reserve. Powell deflected a question about whether this complicated policymaking.
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Trump discussed firing Powell in late 2018 and asked White House lawyers earlier this year to explore options for removing him as Fed chairman, Bloomberg has reported. When answering a similar question Wednesday during his testimony before the House Financial Services Committee, Powell said he wouldn’t leave even if Trump tries to fire him.