By Howard Schneider and Ann Saphir
DENVER (Reuters) – Federal Reserve chairman Jerome Powell on Tuesday flagged openness to further rate cuts to fend off global economic risks, repeating that the central bank will act “as appropriate” amid an economy that he said is likely to continue to expand.
“This feels very sustainable,” Powell said in Denver at the annual meeting of the National Association of Business Economics.
“Clearly things are slowing a bit,” he said, noting that it’s normal for long expansions to have such periods. Twice in the 1990s, he noted, the economy similarly downshifted, only to gain steam once the Fed cut interest rates a few times.
After two rate cuts this year that have supported the “favourable” outlook for jobs and inflation, Powell said, the U.S. economy “may just be gathering itself – there’s no reason why the expansion can’t continue.”
Powell noted recent data revisions showed less job growth in the year to March than previously estimated, turning a “booming” market into one of moderate growth.
Other recent economic data, including a possible contraction in manufacturing, add to the sense of reduced momentum.
“It seems that Powell is trying to, in a soft way, demonstrate to the market that the Fed continues to be aware of the downside risks and is actively willing to support the economic expansion as needed,” said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.
Powell also used his speech to let markets know the central bank would soon begin allowing its balance sheet to expand to ensure smoother functioning of U.S. short-term funding markets.
Recent spikes had raised concern that banks had an inadequate supply of reserves to manage occasional periods of high demand, and Powell’s remarks Tuesday suggested the central bank was coming around to that view and would start buying Treasury bills to replenish reserves.
This move, he emphasized several times, would be technical, had no bearing on monetary policy, and “in no sense” was the same as the bond-buying the Fed conducted in the aftermath of the financial crisis to ease monetary policy.
U.s. Treasury prices rose after Powell’s comments on the balance sheet, while stocks pared losses.
At a separate event, Chicago Fed President Charles Evans said he is open to another rate cut.
“I wouldn’t mind another cut. I could see it either way.” Evans told the Rotary Club in Chicago, saying that lowering borrowing costs again could help the Fed faster achieve its 2% inflation goal. “It would help for a little more insurance. Is it necessary and essential? I’m not sure. But I’m certainly open minded to those arguments.”
Traders of short-term interest-rate futures are currently pricing in more than an 80% chance of a third interest rate cut this year when the Fed next meets, Oct. 29-30. Traders see a 40% chance of a fourth rate cut in December.
Powell did not go so far as to even flag another rate cut upcoming. “We will be data dependent, assessing the outlook and risks to the outlook on a meeting-by-meeting basis, Powell said, repeating that as global risks evolve the Fed would move “as appropriate” to keep the decade-old expansion under way.
“Looking ahead, policy is not on a preset course,” he said.
At the Fed’s last meeting seven of 17 policymakers indicated they felt rates would likely need to be reduced by another quarter of a percentage point by the end of the year, and markets have priced in such a move.
Much of Powell’s speech centred on how a “data dependent” Fed sometimes struggled to be sure it has statistics that accurately inform it about the state of the economy.
Mismeasurement of productivity may have actually understated growth in gross domestic product in recent years, Powell said. More significantly, the revisions to the employment data showed the economy added fewer jobs than previously estimated – a fact that could bolster arguments made by some Fed officials that there is ample “slack” left in the economy and thus room for lower rates.
The use of “big data” may help produce more accurate real-time employment measures in the future, Powell said. But in the meantime the revisions meant that “where we had seen a booming job market, we now see more-moderate growth.”
(Reporting by Howard Schneider and Ann Saphir in Denver, additional reporting by Megan Davies in New York, Karen Pierog in Chicago, and Lindsay Dunsmuir in Washington. Editing by Andrea Ricci and Cynthia Osterman)