Jerome Powell’s Penelope tactics

Jerome PowellJerome Powell, chair of the US Federal Reserve.

J. P. Marín-Arrese | Once again, Jerome Powell played down the need for monetary easing in the press conference following the Fed’s rate cut decision. His unconvincing delivery led Mr Trump to heap scorn on his uninspiring performance. For once, his bitter recriminations were fully justified.

Far from providing solid reasons for lowering the reference rates, the Fed Chairman emphasised the underlying strength of the US economy while stressing that weakness in investment and manufacturing derived exclusively from the uncertainty raised by the ongoing trade war. A problem that monetary policy cannot pretend to solve.

Only lower inflation levels than the Fed’s medium-term objective provided the excuse for a rate cut. A temporary one, as robust job figures and increasing salaries will soon feed-in into higher price and costs pressures. Thus, the prospect for undertaking further easing looks somewhat unlikely. No wonder long-term interest rates immediately hiked while the dollar strengthened, as the markets no longer price-in an aggressive rate cut policy in future. At most, they bet now on a single move later in this year.

Thus, Powell like Penelope unravels once and again the web performed by the central bank he leads. His saboteur behaviour only mirrors the Fed’s reluctance to follow the path the markets and the White House forcefully impose to it. In July he defused the rate cut portraying it as a mere middle-of-cycle adjustment. Now, he melts down any prospect of continued rate cuts.

Powell might turn right in discarding further monetary easing as a recipe for the current doldrums in trade and growth. Yet, his sceptical mood in presenting two successive 0.25 rate cuts, wholly undermines their effectiveness. He has wasted substantial firepower by casting doubts on the need to undertake such moves. His forward guidance seems utterly inconsistent by supporting the opposite view to the steps taken by the Fed.

It is no secret the Fed has acted caving in to pressures from the markets, lacking enough authority to challenge their views. Be it. What seems utterly preposterous is yielding to their demands while trying to disavow them by the backdoor. Fed’s standing suffers a blow from such convoluted tactics.

About the Author

JP Marin Arrese
Juan Pedro Marín Arrese is a Madrid-based economic analyst and observer. He regularly publishes articles in the Spanish leading financial newspaper 'Expansión'.