Monetary policy may not be ideal tool against trade disruptions, Fed's Powell says
Monetary policy might not be the best tool to address the impact of trade wars, although it might help to offset some of their effects, which might prove to be transitory, the head of the world's most important central bank, the US Federal Reserve, said.
...monetary policy alone can’t do much to counter the effects of #trade uncertainty—a correct statement that will increase the political pressure on the central bank; and one that relates to the reality of tools ill suited to lift structural impediments to high inclusive #growth. https://t.co/76igju7zZa— Mohamed A. El-Erian (@elerianm) August 23, 2019
"There are, however, no recent precedents to guide any policy response to the current situation. While monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade," Fed chairman Jerome Powell said in remarks prepared for his speech.
"We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives."
Powell was delivering his speech at the Fed's central banking symposium at Jackson Hole, Wyoming.
"The Committee must attempt to look through what may be passing developments and focus on things that seem likely to affect the outlook over time or that pose a material risk of doing so.
"Risk management enters our decision-making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy."
In his speech, Powell also said that the outlook for inflation and employment remains "largely favourable" and that the downward shift in the expected path for interest rates and the July rate cut had eased financial conditions.
"We are carefully watching developments as we assess their implications for the U.S. outlook and the path of monetary policy," he added.
Powell cited the "growing possibility of a hard Brexit" together with "rising tensions in Hong Kong, and the dissolution of the Italian government" among the potential risks that policymakers were watching.
On the flip side, he highlighted the role of strong consumer spending in sustaining growth.
"Job creation has slowed from last year's pace but is still above overall labor force growth," he added.
"Inflation seems to be moving up closer to 2 percent. Based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective."
Commenting on the possible implications of Powell's remarks, Ian Shepherdson at Pantheon Macroeconomics said: "In other words, the Fed has room to move, but it cannot treat every ratcheting up of the trade war as reason to keep cutting rates without regard to the medium-term inflation picture.
"We don't envy Mr. Powell and his colleagues right now; all their analysis and forecasts can be upended by a single tweet, so the policymaking process has been wrecked, even without the overlay of the president railing at the Fed like Lear on the heath, but less coherently."
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