Powell to Duck Trump Jabs and Let Economy Justify Fed Rate Pause
(Bloomberg) -- President Donald Trump is casting a long political shadow over this week’s meeting of the Federal Reserve.
No increase in interest rates is expected when officials gather on Tuesday and Wednesday in Washington, according to pricing in federal funds futures and all but one of the 57 economists polled by Bloomberg.
But it would be a mistake to link the pause in rate hikes to Trump’s recent complaints over the U.S. central bank’s plan to gradually raise borrowing costs, ditching two decades of White House tradition of avoiding public comment on policy out of respect for Fed independence.
“Recent pressure from the president is having no impact on” how they respond to data, said Priya Misra, head of global rates strategy at TD Securities USA in New York. “Ultimately, they will do what is right for the economy.”
Recent economic data have not urgently flagged the need for a rate hike following Fed moves in March and June. Furthermore, there’s no press conference scheduled after this meeting and the Fed has so far never acted at a gathering that wasn’t followed by a quarterly media briefing. Officials insist that every meeting is live, but investors aren’t swayed.
Chairman Jerome Powell, who will hold a press conference after every meeting starting in January, will next address the media after the Federal Open Market Committee’s Sept. 25-26 gathering. Investors see a more than 80 percent likelihood of a third 2018 rate increase then, versus around 1 percent this week.
His July 17-18 congressional testimony also didn’t signal that the economy was overheating or warranted an imminent hike.
“The FOMC believes that -- for now -- the best way forward is to keep gradually raising the federal funds rate,” Powell, a Trump appointee, told lawmakers.
Just a few days later, on July 19, Trump said in a CNBC interview that Powell “was a very good man” while adding he wasn’t “thrilled” that the Fed was raising rates.
“I don’t like all this work that we are putting into the economy and then I see rates going up,” Trump added.
It was a rare White House trespass in the domain of central bank independence. No matter what the Fed does now, some will second-guess their motives.
Treasury Secretary Steven Mnuchin insisted on Sunday that Trump respects the Fed’s independence in spite of the president’s publicly-voiced concern about its interest rate increases.
Mnuchin even suggested it was appropriate for the central bank to be raising rates as the economy strengthened and inflation picked up.
“The market expects interest rates to keep going up,” he said on “Fox News Sunday.” “The only question is how far, and for how long? And we think the Fed will be very careful in managing the economy.”
Ironically, Powell’s remarks before Congress showed him tilting toward letting the expansion run a bit hot, following his predecessor Janet Yellen, not throttling it back.
Unemployment was 4 percent in June, a half percentage point below what officials regard as the longer-run sustainable rate that keeps supply and demand in balance without causing too-fast inflation. Powell indicated that he still sees a little room for labor markets to tighten further, and recognized the social benefits of rising workforce participation.
“We’re close to full employment, maybe not quite there, but it’s the issues like labor force participation and job training -- addressing the people who are out of the labor force, get them back in,” Powell told the House Financial Services Committee.
The Fed’s preferred inflation indicator rose 2.3 percent in the 12 months through May, partly reflecting a jump in energy prices over that period. The underlying measure, minus food and energy, rose 1.96 percent, effectively at the central bank’s 2 percent inflation goal
Powell described the risks to the outlook as “roughly balanced,” while adding: “I think maybe slightly more worried about lower inflation.”
Translation: He isn’t signaling an urgent need to raise rates even as the economy is still getting a lift from the Fed’s monetary stance.
The real policy rate -- the one that’s adjusted for inflation -- is around zero or slightly negative, depending on which price measure is used. For an economy that expanded 4.1 percent in the second quarter, that is -- as the Fed said in its June statement -- an accommodative policy that’s still supporting the expansion. Powell’s “for now” comment even suggests officials might take a break in the hiking cycle as they approach restrictive policy.
“Monetary tightening is, by definition, unpopular with politicians,” Thomas Costerg, senior economist at Banque Pictet & CIE, said in a note to clients. “We do not think that Powell will pro-actively seek to undermine Trump’s economic agenda.”
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