Powell Fed, under pressure, risks sticking to "middle of the cycle" message

JACKSON HOLE, Wyo. (Reuters) – Federal Reserve Chairman Jerome Powell is attending the Central Bankers' Meeting in Jackson Hole, Wyoming this year, grappling with appropriate monetary policy and external pressures to further cut rates. interest.

It is unlikely that Mr. Powell will benefit from his keynote speech at the Kansas City Fed Annual Economic Symposium on Friday to dismiss much of the message he sent last month after the rate cut. of the Fed for the first time in ten years: "mid-cycle adjustment" and not the beginning of a cycle of falling rates.

He will probably understand that trade tensions, which have intensified since the July 30-31 policy meeting, could worsen the global economic slowdown and make further US rate cuts necessary.

But he should also try to ensure that he is not seen as a thunderbolt before President Donald Trump's repeated attacks to soften the policy, or to yield to a bond market where investors seem to bet strongly that the Federal Open Market Committee end up doing it.

"We can not rule out this year's Jackson Hole being a fundamental policy change from previous years," wrote in a UBS economists note this week. "But more likely, Powell will deliver another risk management talk to try to simplify things, without engaging in bold actions that the committee might not ratify."

Since the central bank's annual gathering in Grand Teton National Park last August, Powell has been facing increasingly difficult terrain, both politically and economically.

Trump regularly reinforced his criticism of the Fed and Powell, who had been hand-picked by the president at the end of 2017 to head the central bank.

Last week, Trump called Powell "helpless" and urged the Fed to cut borrowing costs by one percentage point to revive the economy, which is reflected in the trade war between the United States and the United States. China.

Some Fed policymakers have indicated that the low unemployment rate in the United States, nearly half a century, high consumer spending and other bullish data, would be reason enough to maintain any future rate changes. interest.

But the economy has slowed, Trump's tax cuts and government spending growth are fading, and the business climate and business spending have weakened in the face of the growing uncertainty surrounding the results of the commercial policy of the White House.

While trade wars and other economic developments have slowed growth in countries ranging from Germany to Turkey via Australia, central banks have responded by lowering interest rates, thus creating an international trend that the Fed could struggle to counter.

Powell's colleagues at the Fed do not reach a broad consensus on how to proceed. The Fed chief has brought together the majority of policymakers to vote for last month's rate cuts, but the minutes of Wednesday's meeting revealed a wider gap in the wider committee than reflected. decision.

Caught between these mobile levers, Powell can choose to stay still.

"(Powell) does not want to surprise with a reduction of 100 basis points … (he wants) to telegraph it methodically and get the easing so that everyone can see, anticipate and prepare", said Julia Coronado, who heads the consulting firm MacroPolicy Perspectives and closely follows the Fed.

FEEDBACK LOOPS

Powell is facing other complications that have emerged since the Jackson Hole conference last year.

On the trade side, his headache is that if he cuts rates to compensate for the uncertainties surrounding Trump's policies, the president could simply go further in China, creating more uncertainty. on the markets and between companies and necessitating further rate cuts.

After the rate cuts last month, Trump promised to impose tariffs on additional Chinese imports of $ 300 billion on September 1, although some taxes were postponed until December.

A tracking index of global trade uncertainty has grown recently, leading to an increase in global uncertainty that in the past has paved the way for declines. (For a chart, please see here)

"If the Fed cuts rates at Trump's request, it will ease the pressure on the stock market, which could give it greater influence in its trading relationship with China," said Nicholas Bloom, professor of finance. economics at Stanford University. the authors of the index of policy uncertainty.

"Central banks can not really provide insurance against potential trade wars."

Markets also create a feedback loop that is difficult to navigate. A reversal of the yield curve last week, which reversed and then came back on Thursday, highlighted investors' fear that a recession will be imminent, and if Fed decision makers have put in place guard against an excessive decline in the signal of the decline in long-term borrowing rates, others say that they can not be ignored.

The feedback loop between the Fed and the bond markets "could not be broken until economic data decisively indicate that new relaxation is inappropriate," wrote the economist this week. from Goldman Sachs, Jan Hatzius.

Last year, at Jackson Hole, Powell attempted to fundamentally shift the expectations of US monetary policy toward a data-centric practice and move away from theory-based models. This year, however, the challenge is that the data itself gives contradictory signals.

"Part of the problem is that the Fed has increased transparency and guidance to a level where, when they are in a situation where things are really, literally, uncertain and where it is difficult to give these tips markets do not know what to do. do, "said Maurice Obstfeld, professor of economics at the University of California at Berkeley. "You do not know what will happen next."