Global Markets

Into the valley

Into the valley

Every year since 1982 the Federal Reserve Bank of Kansas City has hosted an economic symposium at Jackson Lake Lodge in Jackson Hole. Located in the state of Wyoming, it is an unlikely choice for global leaders to meet. It is remote, has a sparse population though, in what represents a better metaphor for today’s geopolitics, it is close to the volcanic Yellowstone National Park, an area of geological instability.

Attended by prominent economic policymakers from around the globe, the headline event of the symposium is a speech by Jay Powell, the Chairman of the US Federal Reserve (the Fed). This year’s speech had even greater billing, with economists lining up to learn more about the recent decision by the Federal Open Market Committee (FOMC) to cut interest rates by 0.25%; the first cut in a decade.

While the interest rate cut alone justified keen interest there are other significant factors to consider. For example, the Fed has endured unprecedented political interference by Donald Trump, and has had to contend with the unravelling of a thirty-year consensus favouring globalisation and the virtue of free trade.

Indeed, President Trump, tweeting from France’s Atlantic shores immediately before Powell’s speech, made clear his desire for decisive action:

The Speech and Reaction:

In complete contrast to Trump’s recent histrionics, Powell’s speech was measured.  There was little indication of near-future plans to act aggressively to cut interest rates, or new monetary policy prescriptions. But he reiterated a willingness to act responsibly if economic conditions deteriorated again, stating the Fed ‘would act as appropriate to sustain the expansion.’

Likewise, he appeared eager to remind his audience that the Fed’s mandate is twofold; fostering maximum employment and maintaining price stability.

As can be seen from the chart below, current conditions associated with employment and inflation hardly warrant the aggressive interest rate cutting agenda being pushed for by Trump.

Graph: US Inflation and Unemployment Rates

Source: Bloomberg, data as of August 2019

Economically, the US is in good form. US consumer sentiment for now seems largely unaffected by trade strife. Unemployment rates are very good at 3.7% and inflation subdued at 1.4%; both shown in the chart above. Likewise, The US Services Purchasing Managers Index (not shown in the chart), measuring growth in the economically dominant services sector, remains above 50, indicating expansion. Yet, despite these strong underpinnings, Powell assured his audience that the Fed remains alert should economic growth falter.

Powell did seem to question the efficacy of using monetary policy to help alleviate the immediate effects of increased tariffs, stating ‘while monetary policy is a powerful tool…it cannot provide a settled rulebook for international tradetrade policy is the business of Congress and the Administration.’

Economists believe Powell’s speech sought to justify his moderate, half point rate decrease, as a precautionary response to the slight deterioration observed in the global economic outlook. But if Powell thought suggesting US economic conditions are benign would placate the President, a cursory glance at Twitter shows he was mistaken.

Conclusions

Whilst Powell’s speech did nothing to mollify President Trump it provided greater clarity around the Fed’s decision to cut US interest rates by a mere 0.25%, highlighting the precautionary nature of the action.

US economic data remains positive, but developments on the trade front remain unpredictable, putting the Fed on alert to reorient longer term monetary policy if trade protectionism becomes the established economic relationship of the US and China.

However, a statement from the Chinese commerce ministry released on Thursday expressed a willingness to reach an accord with the US and stated that China would not escalate the dispute, proving there is scope for a negotiated end to the current dispute.