Jerome Powell, chairman of the U.S. Federal Reserve, listens during a House Financial Services Committee hearing in Washington, D.C., U.S. (Photographer: Andrew Harrer/Bloomberg)  

Powell Downplays Tepid Inflation, Showing No Bias to Hike or Cut

(Bloomberg) -- Federal Reserve Chairman Jerome Powell played down recent weakness in U.S. inflation as possibly “transitory” and gave no indication officials were weighing an interest-rate cut despite pressure from the White House to Wall Street.

Powell, who’s been slammed by President Donald Trump for not doing more to support the economy, told reporters after the Fed left its main rate unchanged that the policy stance is “appropriate right now” and “we don’t see a strong case for moving in either direction.”

Stocks fell with Treasuries and the dollar advanced.

Trump, who plans to nominate ally Stephen Moore to a Fed Board seat, called for drastic action on Tuesday as policy makers began their two-day meeting, tweeting that the economy would go “up like a rocket” if they slash rates and resume bond purchases.

The Federal Open Market Committee instead repeated language from its previous meeting, saying it “will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate,” according to a statement Wednesday.

“He did not sound like a man in a hurry to lower interest rates,’’ said Carl Tannenbaum, chief economist at Northern Trust Corp. “He did a good job of outlining that the Fed view of the economy is positive and he mentioned several times that inflation measures appear to be transitory.”

The unanimous 10-0 decision left the target range for the benchmark federal funds rate at 2.25 percent to 2.5 percent.

What Bloomberg’s Economists Say

“While the FOMC’s ‘patient’ guidance in determining future adjustments to policy remained, the statement’s characterization of economic conditions suggests that Fed officials are not rushing to dismiss recent weakness in consumer spending and business investment as transitory.”
--Carl Riccadonna and Yelena Shulyatyeva, economists
Click here for the full note.

The Fed’s emphasis on subdued inflation prompted knee-jerk buying of government debt as traders added to positioning for a rate cut. However, that initial rally reversed on Powell’s comments on appropriate policy and transient inflation. Investors continue to bet on a rate cut, but odds of that happening lessened slightly following Powell’s press conference.

The two-year yield is higher on the day at 2.30 percent, and the 10-year yield has popped back to around 2.50 percent. The U.S. dollar has also reversed and is now stronger.

Powell Downplays Tepid Inflation, Showing No Bias to Hike or Cut

Officials also adjusted one of the tools they use to keep the fed funds rate within its target range, though Powell said the “change does not reflect any shift in the intended stance of monetary policy.”

In addition to weighing economic developments, Fed officials have endured a steady criticism from Trump. Powell, as he has done repeatedly, said officials will ignore the pressure and chart policy according to what best suits the longer-run prospects of the world’s largest economy.

As with recent economic data, the Fed’s assessment of conditions had something for both hawks and doves. Officials slightly upgraded their assessment of the economy, saying “economic activity rose at a solid rate” while “the labor market remains strong.”

That characterization followed a report this week showing consumer spending rebounded in March following a lackluster start to the year. Previous data had pointed to the consumer as a weak spot in an otherwise solid first quarter.

The economy expanded at a 3.2 percent annualized pace from January to March, boosted by exports and inventories growth. The labor market remains robust, with unemployment at around a half-century low and wage gains near the best pace of this expansion.

Still, even with consumption intact and the labor market tightening, inflation has remained vexingly low. The Fed’s preferred price gauge climbed just 1.5 percent in March from a year earlier, well below the central bank’s 2 percent target.

“We suspect that some transitory factors may be at work,” Powell said. “Our baseline view remains that, with a strong job market and continued growth, inflation will return to 2 percent over time and then be roughly symmetric around our longer-term objective.”

Major Challenge

Fed fears over low inflation had been mounting, with Powell recently calling it “one of the major challenges of our time.’’ That’s spurred some speculation that a further slowing in core price gains could prompt officials to cut rates even during a healthy expansion.

“What was news to me was the emphasis on transitory factors holding back inflation,” said Michael Gapen, chief U.S. economist at Barclays Plc. “That’s the part that’s likely to sound hawkish to a market that is expecting rate cuts.”

In a supplemental statement, officials adjusted a tool they use to keep the fed funds rate within its target range, lowering the interest paid on bank reserves deposited with the Fed to 2.35 percent from 2.4 percent.

This was the third such adjustment in a year for interest on excess reserves, or IOER. As in June and December, the step was taken after the rate banks pay to borrow overnight, known as the effective fed funds rate, drifted upward and threatened to reach the upper end of the target range. The Fed said it took to move to help keep rates within the target range.

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