Fed's Powell, under pressure, likely to stick to 'mid-cycle' message
By Ann Saphir and Howard Schneider
JACKSON HOLE, Wyo., Aug 22 (Reuters) - Federal Reserve Chair
Jerome Powell comes to this year's meeting of central bankers in
Jackson Hole, Wyoming, caught between discord within the U.S.
central bank over appropriate monetary policy and mounting
outside pressure for more interest rate cuts.
In navigating that divide, Powell is unlikely to use his
keynote speech on Friday at the Kansas City Fed's annual
economic symposium to veer much from the message he sent last
month after the Fed cut rates for the first time in a decade:
That the move was a "mid-cycle adjustment" and not the start of
a rate-cutting cycle.
He will likely nod to the possibility that trade tensions,
which have escalated since the July 30-31 policy meeting, may
worsen a global economic slowdown and ultimately make more U.S.
rate cuts necessary.
But he is expected also to try to ensure he is not seen as
bowing before repeated attacks from President Donald Trump for
not easing policy further, or caving to a bond market where
investors appear to be heavily betting the policy-setting
Federal Open Market Committee will end up doing so.
"We cannot rule out this year's Jackson Hole being another
fundamental shift in policy as it has been in years past," UBS
economists wrote in a note earlier this week. "But more likely,
Powell will give another speech on risk management to try to
lean dovish without committing to bold actions that the
committee may not ratify."
Since last August's annual central bank gathering in Grand
Teton National Park, Powell has faced an increasingly difficult
terrain both politically and economically.
Trump has steadily ratcheted up his criticism of the Fed and
Powell, who was handpicked by the president in late 2017 to head
the central bank.
Last week, Trump called Powell "clueless" and urged the Fed
to reduce borrowing costs by a full percentage point to boost
the economy, which is feeling the drag from the U.S.-China trade
Some Fed policymakers point to low U.S. unemployment, which
is near a half-century low, strong consumer spending and other
bullish data as reason to hold the line on any further interest
But the economy has slowed as the stimulus from Trump's tax
cuts and increased government spending have faded, and business
sentiment and spending have declined amid mounting uncertainty
over the outcome of the White House's trade policies.
As trade wars and other economic developments have slowed
growth in countries from Germany to Turkey to Australia,
central banks have responded by cutting interest rates, setting
up an international trend the Fed may find it hard to buck.
Powell's colleagues inside the Fed are nowhere near a broad
consensus on how to proceed. The Fed chief mustered a majority
among the current voting policymakers to back last month's rate
cut, but the minutes of the meeting released on Wednesday showed
a wider gulf inside the broader committee than was reflected in
Caught between these moving levers, Powell may opt to stand
"(Powell) does not want to surprise with a 100-basis-point
cut ... (he wants to) telegraph it methodically and achieve the
easing in a way that everybody around the world can see and
anticipate and prepare for," said Julia Coronado, who runs the
consulting firm MacroPolicy Perspectives and follows the Fed
Powell faces other complications that have emerged since
last year's Jackson Hole conference.
On trade, his conundrum is this: If he cuts rates to offset
risks from uncertainties over Trump's policies, the president
may simply go harder at China, creating more uncertainty in
markets and among businesses and making further rate cuts
After the rate cut last month, Trump vowed to impose tariffs
on an additional $300 billion in Chinese imports on Sept. 1,
though he later deferred some of the levies to December.
One index tracking world trade uncertainty has spiked
recently, driving up overall global uncertainty that in the past
has set the stage for downturns. [For a graphic, please see https://tmsnrt.rs/2H9DWj0
"If the Fed cuts rates as Trump demands, that will ease
pressure on the stock market, which Trump may take as giving him
a stronger hand in his trade spat with China," said Nicholas
Bloom, an economics professor at Stanford University and one of
the authors of the policy uncertainty index.
"Central banks can't really provide insurance against
potential trade wars."
Markets are also creating a difficult-to-navigate feedback
loop. A yield curve inversion last week that reversed itself and
then returned on Thursday underscores investors' fears that a
recession may be around the corner, and while some Fed
policymakers have cautioned against taking too much of a signal
from falling long-term borrowing rates, others say they can't be
The feedback loop between the Fed and bond markets "might
not be broken until the economic data signal very decisively
that further easing is inappropriate," Goldman Sachs economist
Jan Hatzius wrote this week.
Last year at Jackson Hole, Powell tried to fundamentally
reset U.S. monetary policy expectations toward a data-centric
practice and away from theory-based models. This year, though,
the challenge is that the data itself is giving mixed signals.
"Part of the problem is that the Fed has raised transparency
and guidance to such a level that when they are in a situation
where things are really, literally, uncertain and it is hard to
give that guidance, the markets don't know what to do," said
Maurice Obstfeld, an economics professor at the University of
California, Berkeley. "You don't know what is going to happen
(Reporting by Ann Saphir
Editing by Dan Burns and Paul Simao)
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