Federal Reserve Chairman Jerome Powell said the consensus among his colleagues at the US central bank is that record US economic expansion can be sustained, but that optimistic view comes with risks.
âFOMC participants continue to view sustained expansion in economic activity, strong labor market conditions and inflation close to our symmetrical target of 2% as most likely. Many outside forecasters agree, âsaid Powell at the annual meeting of the National Association for Business Economics in Denver.
He noted that inflation “has gradually firmed in recent months.”
During the question-and-answer session, Powell said “things are clearly slowing down a bit,” but added that it could be another hiatus that refreshes the expansion. These slowdowns have occurred a few times in this expansion, he noted.
Powell gave no concrete indication to investors about the Fed’s plans for short-term interest rates, saying only that the meeting scheduled for late October “is several weeks away.”
âWe carefully monitor incoming information. We will be dependent on the data, assessing the outlook and the risks to the outlook meeting by meeting, âhe said.
Repeating what the central bank has said in its policy statement since the summer, Powell said the Fed “will do the right thing to support continued growth.”
There is a division within the Fed as to whether more easing or further interest rate cuts are needed.
Some Fed members are backing another rate cut before the end of the year, believing low rates would calm financial markets and give companies a reason to invest. Economists believe this camp includes Powell.
Others on the central bank want to wait for more clues on the health of the economy before giving it more stimulus. They fear that low rates will create what amounts to a short-lived sugar spike for the economy and foster financial imbalances.
Private sector economists predict that the economy will slow down over the next 14 months. Economists at the Peterson Institute for International Economics predict that growth will fall to a rate of 1.8% next year, from 2.6% in the first half of this year.
The Fed cut interest rates by a quarter of a point this year in the last two policy meetings.
Officials will meet again on October 29 and 30. Investors see an 80% chance that the Fed will cut rates another quarter point to a range of 150% to 175%, according to CME Group’s FedWatch tool.
Turning to short-term funding markets, Powell said “a series of factors” may have caused the turmoil seen last month when the cost of short-term borrowing skyrocketed as companies rushed to invest. obtain funding.
Whatever the cause, Powell said now is the time for the Fed to increase the size of its balance sheet. He said the central bank could buy short-term Treasuries.
Some analysts call this a âsoftâ form of quantitative easing as the Fed buys these securities in the market, but Powell bristled at that description.
“I would like to stress that the growth of our balance sheet for reserve management purposes should in no way be confused with the large-scale asset purchase program that we deployed after the financial crisis,” he said. -he declares.
Powell mentioned that the yield curve control, used by the Bank of Japan, could be a tool used to fight the next recession. He also suggested that the central bank was not interested in pushing short-term rates into negative territory, a tool used in both Europe and Japan.
âThe control of the short-term yield curve is worth considering when the time comes,â said Powell.
This is a form of interest rate anchoring, where a central bank agrees to buy the amount of bonds it needs in order to keep a particular part of the yield curve at its target. The BOJ has used yield curve controls to keep Japanese 10-year government bond yields around zero percent since 2016.
Shares were volatile during Powell’s remarks. The Dow Jones Industrial Average DJIA,
recovered from a loss earlier in the day, before losing ground near the fence.