Fed's Powell hints at rate cut, unconventional tools

Reuters
The US Federal Reserve will respond "as appropriate" to the risks posed by a global trade war and other recent developments, Fed Chairman Jerome Powell said.
Reuters

The US Federal Reserve will respond “as appropriate” to the risks posed by a global trade war and other recent developments, Fed Chairman Jerome Powell said yesterday, in remarks that seemed to open the door to the possibility of a rate cut.

In a brief statement included as part of a speech on broader monetary policy issues, Powell said the Fed was “closely monitoring the implications” of a trade dispute that has disrupted global bond and equity markets and posed risks to the United States and world economic growth.

“We don’t know how or when these issues will be resolved,” Powell said. “As always, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near our symmetric 2 percent objective.”

The comments also reflect a diminishing faith at the central bank that the Trump administration will resolve its disputes with top trading nations in a way and on a timetable that poses little risk to US economic growth. The Fed has taken no action since its last rate increase in December, when it set the target federal funds rate in a range of between 2.25 percent and 2.5 percent.

Though low by historical standards, the rate is currently around the level officials feel is “neutral,” in effect letting the economy stand on its own and neither encouraging nor discouraging investment and spending.

With interest rates and inflation mired at such low levels, Powell said, future downturns are likely to force the central bank to again cut rates to zero and resort to “unconventional” tools such as bond buying to support the economy.

Interest rates so close to zero “has become the preeminent monetary policy challenge of our time,” Powell said.

“Perhaps it is time to retire the term ‘unconventional’ when referring to tools that were used in the crisis,” he said. “We know that tools like these are likely to be needed in some form in the future.”

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