Watch Live: Fed Chair Powell Explains Why He Ignored The Biggest Liquidity Crisis In Over A Decade
So… everything’s economically awesome (apart from the biggest liquidity crisis in over a decade) but we should cut rates? Just don’t say “mid-cycle adjustment” – they don’t like that!
Good luck explaining the Fed’s repo function (and why you totally ignored it) and data-dependency, and remember, if the market pukes while you’re talking, we know who will blame you…
Here is a transcript of Powell’s presentation:
Good afternoon, everyone, and welcome. My colleagues at the Federal Reserve and I are dedicated to serving the American people. We do this by steadfastly pursuing the goals Congress has given us, maximum employment and stable prices. We’re committed to making the best decisions we can, based on facts and objective analysis. Today… we decided to lower interest rates. As I will explain shortly, we took this step to help keep the U.S. economy strong in the face of notable developments and to provide insurance against ongoing risks.
The U.S. economy has continued to perform well, we’re into the 11th year of this economic expansion and the baseline outlook remains favorable. The economy grew at 2.5% pace at the first half of the year. Household spending supported by a strong job market, rising incomes and solid consumer confidence has been the key driver of growth. In contrast, business investment and exports have weakened amid falling manufacturing output. The main reasons appear to be slower growth abroad and trade policy developments, two sources of uncertainty that we’ve been monitoring all year. Since the middle of last year, the global growth outlook has weakened, notably in Europe and China.
Additionally… a number of geopolitical risks, including BREXIT remain unresolved. Trade policy tensions have waxed and waned and elevated uncertainty is weighing on U.S. investment and exports. Our business contacts around the country have been telling us that uncertainty about trade policy has discouraged them from investing in their businesses.
Business fixed investment posted a modest decline in the second quarter and recent indicators point to continuing softness. Even so, with household spending, remaining on a solid footing and with supportive financial conditions, we expect the economy to continue to expand at a moderate rate. As seen from FOMC participants most-recent projections, the meaning and expectation for real GDP growth remains near 2% this year and next before edging down toward estimated longer run value. The job market remains strong. The unemployment rate has been near half century lows for a year and a half and job gains have remained solid in recent months. The pace of job gains has eased this year, but we expected some slowing after last year’s strong pace. Participation in the labor force by people in their prime working years has been increasing. And wages have been rising, particularly for lower-paying jobs. People who live and work in low and middle income communities tell us that many who have struggled to find work are now getting opportunities to add new and better chapters to their lives.
This underscores for us, the importance of sustaining the expansion so that the strong job market reaches more of those left behind. We expect the job market to remain strong. The median unemployment rate remains below 4%.
Inflation continues to run below our symmetric 2% objective over the 12 months through July, total PCE inflation is 1.4%, and core inflation which excludes volatile food and energy prices, 1.6%. We still expect inflation to rise to 2%. Median projection is 1.9% this year and 2% in 2021. However, inflation procedures remain muted and indicators of long-term inflation remains at the low end of historical ranges.
Continued below-target inflation could relate to long-term expectations. Overall, we continue to see sustained expansion of economic activity and strong labor market conditions and inflation near our symmetric 2% objective is most likely. These factors in conjunction with muted inflation procedures have led us to shift our views about appropriate monetary policy over time toward a lower pass for the federal funds rate and this shift has supported the outlook. This is the role of monetary policy, to adjust interest rates to strong labor market and keep inflation near our 2% objective.
Today’s decision to lower the federal funds rate target a quarter% — — we’ve seen additional signs of weakness abroad and resurgence of policy tensions including the imposition of additional tariffs. The Fed has no role in the formulation of trade policy, but we do take into account, anything that could materially affect the economy, relative to our employment and inflation goals. The future course of monetary policy will depend on how the economy evolves and what developments imply for the economic outlook and risks to the outlook.
We’ve often said that policy is not on a preset course and that is certainly the case today. As I noted, the baseline economic outlook remains positive. The projections of appropriate policy show that participants generally anticipate only modest changes in the federal funds rate over the next couple years. Of course, those views are merely forecasts and as always, will evolve with the arrival of new information.
Let me say a few words about our monetary policy operations. Pressures in money markets were elevated this week and the effective federal funds rate rose above the top of its target range yesterday. While these issues are important for market functioning and market participants, they have no implications for the economy or the stance of monetary policy.
This upward pressure emerged as funds flowed from the private sector to the treasury to meet corporate tax payments and settled treasury securities. To counter these pressures, we conducted overnight repurchase operations yesterday and again today. These temporary operations were effective in relieving funding pressures and we expect the federal funds rate to move back into the target range.
In addition, as we’ve done in the past, we made a technical adjustment to the interest rate paid on requiring excess reserve balances, setting it 20 basis points below the top of the target range for the federal funds rate. In related action, we also adjusted the rate on the overnight repurchase facility to five basis points below the bottom of the target range. We’ll continue to monitor market developments and conduct operations as necessary, to foster trading in the federal funds market at rates within the target range.
Consistent with our decision earlier this year, to continue to implement monetary policy in ample reserves regime, we will, over time, provide a sufficient supply of reserves so that frequent operations are not required.
To summarize… we are fully committed to pursuing our goals of maximum employment and stable prices. As the committee contemplates the future path for a federal funds rate, it will continue to monitor the implications of incoming information for the economic outlook and will act as appropriate to sustain the expansion. With a strong labor market, inflation near its symmetric 2% objective. Thanks, I’ll be happy to take your questions
Wed, 09/18/2019 – 14:25