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Powell Highlights Fed’s Limits. Trump Labels Him an ‘Enemy’

JACKSON, Wyo. — Jerome H. Powell, the Federal Reserve chair, kept future interest rate cuts squarely on the table on Friday but suggested that the central bank was limited in its ability to counteract President Trump’s trade policies, which are stoking uncertainty and posing risks to the economic outlook.

Mr. Powell’s remarks drew a swift and angry reaction from Mr. Trump, who equated the Fed leader with the president’s adversary in the trade war, President Xi Jinping of China.

“My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?,” Mr. Trump wrote in one of a series of Twitter posts.

….My only question is, who is our bigger enemy, Jay Powell or Chairman Xi?

— Donald J. Trump (@realDonaldTrump) August 23, 2019

The president’s harsh response to Mr. Powell, a frequent target of Mr. Trump’s ire, came after the Fed chair suggested that the central bank may be unable to overcome economic uncertainty stemming from the president’s trade war.

“While monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rule book for international trade,” said Mr. Powell, who spoke in Jackson, Wyo., at the Federal Reserve Bank of Kansas City’s annual symposium.

“Our challenge now is to do what monetary policy can do to sustain the expansion” to achieve the Fed’s goals of low unemployment and stable inflation, he had said earlier in the speech.

Mr. Powell’s remarks indicated that the Fed, which cut interest rates in July for the first time in more than a decade, remained willing to cut them again in order to keep the economy growing.

But his reluctance to clarify the timing or size of any such move highlighted the central bank’s predicament: Unemployment is low and consumer spending is strong, but Mr. Trump’s trade conflict is fueling uncertainty, weighing on manufacturing and roiling markets. And the Fed is limited in its ability to resolve unpredictability.

“Trade policy uncertainty seems to be playing a role in the global slowdown and in weak manufacturing and capital spending in the United States,” Mr. Powell said, adding that there were “no recent precedents to guide any policy response to the current situation.”

His comments followed Beijing’s announcement on Friday that China would retaliate against the Trump administration’s next round of tariffs by increasing taxes on $75 billion of American imports, including agricultural products, crude oil and cars. Both countries plan to increase their levies in September and December, which could exacerbate the economic harm from a trade war that is already causing financial pain across the globe.

They also come as trade tensions, and not just those created by Mr. Trump, threaten growth abroad. Mark Carney, who heads the Bank of England, said in a Jackson Hole speech that the threat of an unruly Brexit looms large for his domestic economy.

“In recent weeks, the perceived likelihood of No Deal has risen sharply,” he said. “In my view, the appropriate policy path would be more likely to ease than not” if that should happen, though the right approach would hinge on the details.

ImageCreditAmber Baesler/Associated Press

Mr. Carney also said that slower global growth “reflects a significant spike in economic policy uncertainty and the related risk that protectionism could prove more pervasive, persistent and damaging than previously expected.” He said that could leave central bankers with less monetary policy ammunition than they already have.

In the United States, Mr. Powell noted that the weeks since the Fed’s last meeting, on July 31, “have been eventful.” The day after that meeting, Mr. Trump announced that the country would tax another $300 billion in Chinese products. Since then, further evidence of a global slowdown has emerged and financial markets have reacted to the “complex, turbulent picture,” Mr. Powell noted.

He said that policymakers were “carefully watching developments” as they assessed the implications for the economic outlook and monetary policy, and maintained an earlier pledge to “act as appropriate to sustain the expansion.”

Against that backdrop, some members of the policy-setting Federal Open Market Committee support cutting rates to shore up economic growth, while others want to wait to monitor how the trade dispute plays out.

“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,” Mr. Powell said.

Mr. Trump, who appointed Mr. Powell to a four-year term, has said that the Fed should use monetary policy to even the playing field with trading partners like China and Germany, which he believes are weakening their currencies and lowering rates to gain an economic advantage over the United States.

“Our Federal Reserve does not allow us to do what we must do,” the president said in a tweet on Thursday, adding that Fed officials “move like quicksand. Fight or go home!”

Investors fully expect a rate cut in September and anticipate another before the end of the year, based on market pricing measured by the CME Group.

Fed officials often point to two mid-1990s rate-cutting cycles as rough templates for how the central bank is approaching policy now. In both instances, the Fed cut rates by 75 basis points to help get the economy through rough patches.

Mr. Powell referred those episodes in his remarks on Friday, noting that “the Fed was cutting, not raising, rates in the months prior to the end of the first two expansions in this era, and the ensuing recessions were mild by historical standards.”

Speaking on Bloomberg Television on Friday, James Bullard, the president of the Federal Reserve Bank of St. Louis, called those instances a “great baseline” to reference for policy now, although he did not commit to matching their size.

“That’s what they did in the ’90s,” Mr. Bullard said. “I don’t know where we’ll end up.”

The Fed is also contending with inflation that has run stubbornly below the 2 percent goal level that the central bank views as consistent with a healthy economy. The need to return inflation to its goal quickly was one reason that the central bank cut rates in July.

While policymakers historically have set interest rates to keep very-low unemployment from spurring faster inflation, Mr. Powell’s remarks show how that the calculus is changing.

Mr. Powell noted that in the 1990s, the Fed was able to cut rates to support employment “without destabilizing inflation.” At another point in the speech, he said that “low inflation seems to be the problem of this era, not high inflation.”


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