Since last August’s annual central bank gathering in Grand Teton National Park, Jerome Powell has faced an increasingly difficult terrain both politically and economically.Sarah Silbiger/Reuters
U.S. Federal Reserve chair Jerome Powell comes to this year’s meeting of central bankers in Jackson Hole, Wyo., caught between discord within the U.S. central bank over appropriate monetary policy and mounting outside pressure for more interest rate cuts.
In navigating that divide, Mr. Powell is unlikely to use his keynote speech on Friday at the Kansas City Fed’s annual economic symposium to veer much from the message he sent last month after the Fed cut rates for the first time in a decade: that the move was a “mid-cycle adjustment” and not the start of a rate-cutting cycle.
He will likely nod to the possibility that trade tensions, which have escalated since the July 30-31 policy meeting, may worsen a global economic slowdown and ultimately make more U.S. rate cuts necessary.
But he is expected also to try to ensure he is not seen as bowing before repeated attacks from President Donald Trump for not easing policy further, or caving to a bond market where investors appear to be heavily betting the policy-setting Federal Open Market Committee will end up doing so.
“We cannot rule out this year’s Jackson Hole being another fundamental shift in policy as it has been in years past,” UBS economists wrote in a note earlier this week. “But more likely, Powell will give another speech on risk management to try to lean dovish without committing to bold actions that the committee may not ratify.”
Since last August’s annual central bank gathering in Grand Teton National Park, Mr. Powell has faced an increasingly difficult terrain both politically and economically.
Mr. Trump has steadily ratcheted up his criticism of the Fed and Mr. Powell, who was handpicked by the President in late 2017 to head the central bank.
Last week, Mr. Trump called Mr. Powell “clueless” and urged the Fed to reduce borrowing costs by a full percentage point to boost the economy, which is feeling the drag from the U.S.-China trade war.
Some Fed policy-makers point to low U.S. unemployment, which is near a half-century low, strong consumer spending and other bullish data as reason to hold the line on any further interest-rate moves.
But the economy has slowed as the stimulus from Mr. Trump’s tax cuts and increased government spending have faded, and business sentiment and spending have declined amid mounting uncertainty over the outcome of the White House’s trade policies.
As trade wars and other economic developments have slowed growth in countries from Germany to Turkey to Australia, central banks have responded by cutting interest rates, setting up an international trend the Fed may find it hard to buck.
Mr. Powell’s colleagues inside the Fed are nowhere near a broad consensus on how to proceed. The Fed chief mustered a majority among the current voting policy-makers to back last month’s rate cut, but the minutes of the meeting released on Wednesday showed a wider gulf inside the broader committee than was reflected in the decision.
Caught between these moving levers, Mr. Powell may opt to stand still.
Mr. Powell "does not want to surprise with a 100-basis-point cut … [he wants to] telegraph it methodically and achieve the easing in a way that everybody around the world can see and anticipate and prepare for,” said Julia Coronado, who runs the consulting firm MacroPolicy Perspectives and follows the Fed closely.
FEEDBACK LOOPS
Mr. Powell faces other complications that have emerged since last year’s Jackson Hole conference.
On trade, his conundrum is this: If he cuts rates to offset risks from uncertainties over Mr. Trump’s policies, the President may simply go harder at China, creating more uncertainty in markets and among businesses and making further rate cuts necessary.
After the rate cut last month, Mr. Trump vowed to impose tariffs on an additional US$300-billion in Chinese imports on Sept. 1, although he later deferred some of the levies to December.
One index tracking world trade uncertainty has spiked recently, driving up overall global uncertainty that in the past has set the stage for downturns.
“If the Fed cuts rates as Trump demands, that will ease pressure on the stock market, which Trump may take as giving him a stronger hand in his trade spat with China,” said Nicholas Bloom, an economics professor at Stanford University and one of the authors of the policy uncertainty index.
“Central banks can’t really provide insurance against potential trade wars.”
Markets are also creating a difficult-to-navigate feedback loop. A yield curve inversion last week that reversed itself and then returned on Thursday underscores investors’ fears that a recession may be around the corner, and while some Fed policy-makers have cautioned against taking too much of a signal from falling long-term borrowing rates, others say they can’t be ignored.
The feedback loop between the Fed and bond markets “might not be broken until the economic data signal very decisively that further easing is inappropriate,” Goldman Sachs economist Jan Hatzius wrote this week.
Last year at Jackson Hole, Mr. Powell tried to fundamentally reset U.S. monetary policy expectations toward a data-centric practice and away from theory-based models. This year, though, the challenge is that the data itself is giving mixed signals.
“Part of the problem is that the Fed has raised transparency and guidance to such a level that when they are in a situation where things are really, literally, uncertain and it is hard to give that guidance, the markets don’t know what to do,” said Maurice Obstfeld, an economics professor at the University of California, Berkeley. “You don’t know what is going to happen next.”