Powell Waves Off Recession Fear While Leaving Rate Cuts on Table
(Bloomberg) -- Terms of Trade is a daily newsletter that untangles a world embroiled in trade wars. Sign up here.
Federal Reserve Chairman Jerome Powell pushed back against perceptions that the U.S. economy was tilting into a recession, while leaving the door open to further interest-rate cuts to keep the country’s record economic expansion on track.
Speaking Friday in Zurich, Powell said consumer spending and support from monetary policy should help deliver economic growth between 2% and 2.5% this year. His remarks followed a mixed August jobs report and other readings on the economy that show fallout from President Donald Trump’s trade disputes.
“The most likely outlook for our economy remains a favorable one with moderate growth, a strong labor market and inflation moving back up close to our 2% goal,’’ Powell said during a question and answer session. “All that said, there are significant risks and we’ve been monitoring those, including slowing global growth, uncertainty around trade policy, and also persistently low inflation.”
The chairman’s remarks sought to counter pessimism building in the financial markets since Trump escalated his trade war with China last month and weak manufacturing data stoked recession fears. Analysts were divided after Powell’s remarks over whether he was underplaying risks or was simply trying to shore up confidence in the outlook.
“He is trying to manage expectations for how many cuts they are going to do,” said Drew Matus, chief market strategist at MetLife Investment Management. “Nothing that we are seeing today is suggesting that we have to have a recession anytime soon.”
Investors fully anticipate U.S. central bankers to cut interest rates by a quarter-percentage point when they next meet Sept. 17-18 in Washington, according to pricing in federal funds futures contracts. Powell’s comments were his last scheduled public remarks on policy as the Fed enters its pre-meeting blackout period.
“Our main expectation is not at all that there will be a recession,’’ Powell said. “There are these risks, and we’re monitoring them very carefully and we’re conducting policy in a way that will address them.’’
The Fed chief also described the labor market as being in "a good place." Luke Tilley, chief economist at Wilmington Trust, took a more cautious view.
“The labor market is increasingly challenged,” Tilley said. “We have the weakest job growth of this recovery.”
During the hour-long question and answer session, Powell avoided the term “mid-cycle adjustment,’’ a phrase from his July press conference that whipsawed markets and caused debate among analysts at the time because it suggested limited cuts.
Instead, on Friday he turned to a concept -- the future path of interest rates -- which was used in the Fed’s July statement, when it announced the first rate cut since 2008.
That cut was the culmination of a long pivot, which began in January when Powell put policy on hold after presiding over four rate hikes in 2018. Investors have responded accordingly, with expectations centering around at least two more quarter-point reductions this year.
“Part of the reason the outlook is good is that the Fed has, through the course of the year, seen fit to lower the expected path of interest rates,’’ Powell said. “That has supported the economy -- that is one of the reasons why the outlook is still a favorable one despite these crosswinds.’’
Fed officials are also struggling with the impact of trade-related uncertainty on the economy and whether White House negotiators will get any closer to a deal to end the trade war with China in meetings over the coming weeks.
“Trade policy uncertainty will be weighing on business investment decisions,” Powell said.
The chairman said the two dissents he suffered against the decision to cut rates in July were partly because it’s “murky out there,’’ but he anticipates continued backing from his colleagues.
“We are clearly at a time where there’s a range of views, and again I do think that’s a very healthy thing,’’ Powell said. “I expect we’ll have strong support for the decisions that we make, as we had in July. I expect that will continue.’’
©2019 Bloomberg L.P.