Powell’s wait-and-see stance

chair powellChair Jerome Powell

Juan Pedro Marín Arrese | Jerome Powell made it clear at the press conference following the Fed’s meeting that he and his colleagues are in no hurry to adjust rates. They will only move should prices undertake further progress to converge with the 2% target or the economy markedly cool down, sharply deteriorating employment. Carefully avoiding casting comments on the new administration’s policies, he emphasised the Fed’s commitment to independence in enforcing its mandate while abiding by Trump’s executive orders. Preserving the full ability to make decisions based on economic judgment free from political pressure is crucial for running sound money and credit conditions. Yet, it seems evident Powell is eager to avoid running into a collision course with the unpredictable president, even if they come at odds on rates.

Keeping a wait-and-see approach seems the only reasonable choice given the huge uncertainty raised by the upcoming policies and their potential economic impact. Take, for instance, Trump’s promise to significantly raise tariffs. Although it would spur inflationary pressures, it may also adversely affect activity and employment. On balance, the combined effect of these policies is unknown, and taking pre-emptive action before the scenario unfolds would be a reckless bet. Canada’s central bank has already lowered rates taking for granted harsh tariffs will be enacted, crippling several key sectors. No one can yet guess the potential damage retaliatory measures could inflict on the US economy.

Markets should feel relieved as Powell carefully refrained from mentioning any prospect of a potential U-turn in the current monetary path towards a neutral level. Such a switch would wreak havoc on financial stability, as sudden hikes in interest rates may dump loan guarantees and lead to massive defaults. The only feasible option is to keep rates on hold until inflation becomes consistently subdued. Right now, monetary policy can only envisage a one-way direction lane. As Powell pointed out, the Fed runs it meaningfully tight. Any potential easing must duly ponder the balance of risks on price stability and employment, the key targets of the Fed’s mandate. Under the current circumstances, maintaining a tight hold seems fully warranted, even if it defies Trump’s calls for lowering rates. 

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'.