Fed Chair Paints Rosy Economic Picture but Says Risks Remain

on Nov14
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WASHINGTON — Jerome H. Powell, the Federal Reserve chair, painted an optimistic picture of the United States economy before Congress on Wednesday, though he warned that threats to the outlook persisted.

“In particular, sluggish growth abroad and trade developments have weighed on the economy and pose ongoing risks,” Mr. Powell said during his prepared remarks.

The United States’ central bank has cut interest rates three times since late July, as tensions from President Trump’s trade war and slowing growth abroad unnerved companies and weighed on investment. Lower borrowing costs have helped to cheapen mortgage costs and could keep consumers, the main engine of economic growth, spending.

But as investors increasingly expect trade tensions to ease and as the effects of the recent rate cuts play out, the Fed has indicated that it may shift to a wait-and-see mode as it tries to gauge whether further action is necessary. Mr. Powell upheld that message before lawmakers.

“We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook,” he reiterated.

Mr. Powell, who spoke before Congress’ Joint Economic Committee, indicated that the Fed was keeping an open mind about the possibility that the job market — which is performing well, with unemployment near its lowest level in 50 years — could continue chugging along as wage growth remained moderate and inflation muted.

“What we have learned — and what we continue to learn — is that the U.S. economy can operate at a much lower level of unemployment than many would have thought,” Mr. Powell said in response to lawmaker questions. “I’m very open to the idea that we don’t know where maximum employment precisely is.”

That statement speaks directly to the Fed’s key goals.

The central bank is tasked with maintaining both full employment and low and stable inflation. Officials had long believed that very low joblessness would quickly push prices higher — an assumption that played a key role in their decision to lift interest rates nine times between the end of 2015 and the end of 2018. But the central bank is now reassessing that view as the job market continues to add workers but wages grow slowly and inflation remains well below the Fed’s 2 percent goal.

“The data are not sending any signal that the labor market is so hot, or that inflation is moving up, or anything like that,” Mr. Powell said, noting that the strong job market has many beneficial side effects, including lifting wages for lower-paid workers.

That view could influence policy decisions in the coming months. If the Fed is more comfortable than it once was maintaining a seemingly tight labor market, that could keep it from rushing to raise rates out of fear that prices might take off.

In fact, Mr. Powell indicated after the central bank’s last meeting that the Fed was not considering raising rates now, specifically pointing to muted inflation.

Mr. Powell also used the appearance to emphasize the central bank’s freedom from the political process.

“Politics plays absolutely no role in our decisions,” he said. “We won’t make mistakes of character or integrity.”

The Fed’s independence has been under strain over the past year, with Mr. Trump regularly attacking it for not lowering borrowing costs quickly enough and blaming the central bank for any economic weakness. On Tuesday, Mr. Trump again criticized the Fed during a speech before the Economic Club of New York, accusing it of putting the United States at a competitive disadvantage to other nations.

“We are actively competing with nations who openly cut interest rates so that now many are actually getting paid when they pay off their loan, known as negative interest,” Mr. Trump said. “I want some of that money.”

Mr. Powell said during his testimony that negative rates “would certainly not be appropriate in the current environment” because the United States economy “is in a strong position.”

While Mr. Trump has pointed at the Fed for any lackluster economic or stock market performance, Mr. Powell suggested a different culprit — the president’s own trade war.

A slowdown in gross domestic product growth in the third quarter partly reflected an autoworker strike but “also reflects weakness in business investment, which is being restrained by sluggish growth abroad and trade developments,” Mr. Powell noted.

While the Fed does not play a role in setting trade policy, “this is one of those things that we called out as something we are aware of — and something that is weighing on business sentiment and ultimately the economy,” he later added.

Despite those risks, the Fed chief expressed optimism about the state of the American economy, which is in the 11th year of a record-long expansion.

“The pace of job gains has eased this year but remains solid,” he said in his opening remarks. “Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labor market and inflation near our symmetric 2 percent objective as most likely.”

Mr. Powell added that while the Fed was reviewing its recession-fighting tools, it would be important for Congress to step up come the next downturn. And he indicated that, though many in the economics profession had become more comfortable with large budget deficits, he did not rank among them.

“Putting the federal budget on a sustainable path would aid the long-term vigor of the U.S. economy and help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy if it weakens,” he said.

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