On Wednesday, July 31, 2019 FOMC Chairman Jerome Powell gave his scheduled July 2019 FOMC Press Conference. (link of video and related materials)
Below are Jerome Powell’s comments I found most notable – although I don’t necessarily agree with them – in the order they appear in the transcript. These comments are excerpted from the “Transcript of Chairman Powell’s Press Conference“ (preliminary)(pdf) of July 31, 2019, with the accompanying “FOMC Statement.”
From Chairman Powell’s opening comments:
CHAIR POWELL: Good afternoon, and welcome.
We decided today to lower the target for the federal funds rate by a quarter of a percentage point to a range of 2 percent to 2-1/4 percent. The outlook for the U.S. economy remains favorable and this action is designed to support that outlook. It is intended to insure against downside risks from weak global growth and trade policy uncertainty; to help offset the effects these factors are currently having on the economy; and to promote a faster return of inflation to our symmetric 2 percent objective. All of these objectives will support achievement of our overarching goal: to sustain the expansion, with a strong job market and inflation close to our objective, for the benefit of the American people. We also decided to conclude the runoff of our securities portfolio in August, rather than in September as previously planned.
GDP growth in the second quarter came in close to expectations. Consumption— supported by rising incomes and high household confidence—is the main engine driving the economy forward. But manufacturing output has declined for two consecutive quarters, and business fixed investment fell in the second quarter. Foreign growth has disappointed, particularly in manufacturing, and notably in the euro area and China. In response to this weakness, many central banks around the world are increasing policy accommodation or contemplating doing so. After simmering early in the year, trade policy tensions nearly boiled over in May and June, but now appear to have returned to a simmer. Looking through this variability, our business contacts tell us that the ongoing uncertainty is making some companies more cautious about their capital spending.
The domestic inflation shortfall has continued. Core inflation, which excludes food and energy prices and is a better gauge of future developments than is total inflation, has run at 1.6 percent over the past 12 months. We continue to expect that inflation will return over time to 2 percent. But domestic inflation pressures remain muted, and global disinflationary pressures persist. Wages are rising, but not at a pace that would put much upward pressure on inflation. We are mindful that inflation’s return to 2 percent may be further delayed, and that continued below-target inflation could lead to a worrisome and difficult-to-reverse downward slide in longer-term expectations.
Jerome Powell’s responses as indicated to the various questions:
MICHAEL MCKEE. Michael McKee from Bloomberg Television and Radio. There’s a perception out there that perhaps in this case the Fed is something of a hammer in search of a nail because the latest consumer spending reports, as you suggested, don’t seem to show any kind of demand problem in the U.S. and when you look at mortgage rates, auto lending rates, they’ve all come down, and so wondering exactly what problem lower capital costs will solve.
CHAIR POWELL. So, you’re absolutely right. The performance of the economy has been reasonably good. The position of the economy is as close to our objectives as it’s been in a long time, and the outlook is also good. What we’ve been monitoring since the beginning of the year is effectively downside risks to that outlook from weakening global growth, and we see that everywhere, weak manufacturing, weak global growth now particularly in the European Union and China. In addition, we see trade policy developments, which at times have been disruptive and then have been less so, and also inflation running below target. So, we see those as threats to what is clearly a favorable outlook, and we see this action as designed to support them and keep that outlook favorable. And frankly, it is a continuation of what we’ve been doing all year to provide more support against those very same risks.
MICHAEL MCKEE. [inaudible] question is how does it do that? How does cutting interest rates lower, or how does cutting interest rates keep that going since the cost of capital doesn’t seem to the issue here.
CHAIR POWELL. You know, I really think it does, and I think the evidence of my eyes tells me that our policy does support, it supports confidence, it supports economic activity, household and business confidence, and through channels that we understand. So, it will lower borrowing costs. It will, and it will work. And I think you see it. Since, you know, since we noted our vigilance about the situation in June, you saw financial conditions move up, and you saw, I won’t take credit for the whole recovery, but you saw financial conditions move up. You see confidence, which had troughed in June. You saw it move back up. You see economic activity on a healthy basis. It just, it seems to work through confidence channels as well as the mechanical channels that you are talking about.
STEVE LIESMAN. Steve Liesman, CNBC. I just want to follow up on that. Would you say we’re sort of, you guys have gotten into a new regime here? This is sort of an insurance cut and not a data-dependent cut, and are we now more in the realm of watching headlines of trade talks than we are watching unemployment rate and inflation numbers or and growth numbers? How do we know what you’re going to do next and why now in this new regime?
CHAIR POWELL. Yeah. So, I gave three reasons for what we did, and that is to ensure against downside risks to the outlook from weak global growth and trade tensions. So, that is, in a sense, that is a risk management point, and that is a bit of insurance, but we also feel like weak global growth and trade tensions are having an effect on the U.S. economy. You see it now, in the second quarter you see weak investment. You see weak manufacturing. So, support demand there. And also to support return of inflation at two percent. But there’s definitely an insurance aspect of it. Trade is unusual. We don’t, you know, the thing is, there isn’t a lot of experience in responding to global trade tensions. So, it is a, it’s something that we haven’t faced before and that we’re learning by doing. And it is not, it’s not exactly the same as watching global growth where you see growth weakening, you see central banks and governments responding with fiscal policy, and you see growth strengthening, and you see a business cycle. With trade tensions, which do seem to be having a significant effect on financial market conditions and on the economy, they evolve in a different way, and we have to follow them. And by the way, I want to be clear here. We play no role whatsoever in assessing or evaluating trade policies other than as trade policy uncertainty has an effect on the U.S. economy in the short and medium term. We’re not in any way criticizing trade policy. That’s really not our job.
EDWARD LAWRENCE. Edward Lawrence with Fox Business Network. So, a rate hike last December was seen by some economists, and the St. Louis Fed president, James Bullard, as a step too far. Now the Fed has waited about seven months for a rate cut. You said today you were concerned about downside risks. So, could some of the weakness on the business side with that fixed investment and the sluggish side on the business side be because the Fed waited so long. I want to get your thoughts on that. And talk about why you feel that this nudge is the right level.
CHAIR POWELL. Yeah, so we don’t hear that from businesses. They don’t come in and say we’re not investing because, you know, the federal funds rate is too high. I haven’t heard that from a business. What you hear is that demand is weak for their products. You see manufacturing being weak all over the world. Investment, business investment is weak, and I wouldn’t lay all of that at the door of trade talks. I think there’s a global business cycle happening with manufacturing and investment, and that’s been, you know, definitely a bigger factor than certainly we expected late last year. I think global growth started to slow down in the middle of last year, but that has gone on to a greater extent. And by the way, trade policy uncertainty has also been, I think, more elevated than we anticipated. In terms of is this the, we believe this is the right move for today, and we think it’s, we think it will serve the three ends that I mentioned. And I’ve already gone over how we’re thinking about going forward.
GREGORY ROBB. Thank you, Chairman Powell. Greg Robb from MarketWatch. I was wondering, we weren’t in the room, but I think it’s a fair assumption to know that the two dissenters probably spoke about financial stability concerns. So I was wondering if you could talk about what you, what was your response to them when those concerns were raised. I’ve collected a couple things from the IMF and the Bank of International Settlements, said that it’s just, when you have low rates, you just get more debt in the economy, and that there’s also this feeling that it makes it harder to raise rates. So, could you talk about that? Thanks.
CHAIR POWELL. Yeah, so first let me say, I’ll just speak for myself, but I understand those concerns very well. I do. I’ve, you know, I’ve studied them, I’ve spoken about them, and I take them very seriously. But as I look at today’s situation, I don’t see them as a reason not to take this action today. I just don’t think—that would be my point. And one of the reasons why I think that is if you look, if you look—so we have a financial stability framework now for the first time. Before the crisis, we didn’t have this, but now we have it, and we publish it. And we look at really four big things so that we know we can, you know, the public can hold us accountable and compare us meeting to meeting and, you know, and see whether we got this right. So, it’s transparent now.
But the four things we look at are valuation pressures, and we do see notable valuation pressures in some markets, but you know, honestly not at a highly troubling level. In terms of household borrowing, household business borrowing is the second thing, households are in a very good shape overall. I’ll come back to business borrowing. Leverage in the financial system is low, and funding risk is low. So, overall, staff’s view has been, and my view has been that if you look overall financial stability vulnerabilities are moderate.
The place that gets all the attention right now, a lot of attention, is business borrowing, and we look very carefully at that. What’s happening with business borrowing is the loans have moved off the balance sheets of the banks and into market-based vehicles, which tend to be stably funded, but nonetheless, it’s clear that the highly leveraged business sector could act as an amplifier to a downturn. So, we’re watching that very carefully. But again, I think if you look overall at the U.S. financial system, what you see is a high-level of resilience, much higher than it was before the crisis, and that’s something to take comfort from. And I think all of that gives us the ability to use monetary policy for its purposes and rely on supervisory and regulatory tools to, you know, to keep the financial system resilient.
BRIAN CHEUNG. Hi, Brian Chung with Yahoo Finance. Just to expand on that point about communication. I mean we saw that markets have been particularly sensitive we regards to New York Fed president John Williams’s remarks before the blackout period. So, the Fed added language in the statement that says that the Committee is contemplating the future path and target range for the federal funds rate as it monitors implications. I’m wondering, now there’s kind of this inflection point about whether or not the downside risk because you’ve had to cut rates outweighs the fact that you still see a positive outlook of the U.S. economy at a baseline. So, just wondering if you can kind of clarify all those things within the context of the challenges of communicating it?
CHAIR POWELL. Yeah, so again, I see the U.S. outlook as being a positive one. And we do, we have had these global really, risks, to the outlook. There really is nothing in the U.S. economy that presents a, you know, a prominent near-term threat to the U.S. economy. As I mentioned, there’s no, there’s no segment that’s really, or sector that’s really boiling over and over heating. Nothing like that. It’s within, within the economy. It’s healthy. So, I would say that. Downside risks are really coming from abroad, and of course we are concerned about low inflation. But, and by the way, those risks from abroad are affecting the manufacturing sector here and business investment, fixed investment, so.
The Special Note summarizes my overall thoughts about our economic situation
SPX at 2957.03 as this post is written