JACKSON HOLE, Wyo.—Federal Reserve Chairman
gave his most forceful warning yet about the risks to the U.S. economy from escalating trade tensions and the limits to the central bank’s ability to cushion any fallout.
Mr. Powell, in a widely anticipated speech here Friday, signaled the central bank would follow itsrate cut last month, its first in more than a decade, with an additional reduction soon. But he stopped short of saying how much stimulus the Fed might provide beyond that.
There are “no recent precedents to guide any policy response to the current situation. Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment and public confidence, it cannot provide a settled rulebook for international trade,” Mr. Powell said at the Kansas City Fed’s annual symposium.
He didn’t push back against market expectations of a rate cut at the Fed’s Sept. 17-18 meeting, and he left an open door to providing more stimulus after that. “We will act as appropriate to sustain the expansion,” Mr. Powell said.
Markets slumped ahead of Mr. Powell’s speech after China said it would impose tariffs on $75 billion worth of U.S. products to retaliate against similar measures announcedearlier this month by Mr. Trump.
Stocks recovered after Mr. Powell’s remarks, but then they fell sharply after Mr. Trump fired back at China on Twitter, calling on U.S. businesses to prepare for new, unspecified countermeasures against Beijing. He also took another shot at his Fed chairman, who goes by Jay, and at the central bank.
“As usual, the Fed did NOTHING! It is incredible that they can ‘speak’ without knowing or asking what I am doing,” he wrote. “My only question is, who is our bigger enemy, Jay Powel [sic] or Chairman Xi?” he added.
Mr. Trump has frequently criticized the Fed in recent weeks andcalled for it to deploy stimulus measurestypically reserved for periods when the economy is falling into a recession.
Mr. Powell, who was named by Mr. Trump to a four-year term that began last year, has been careful not to engage in a back-and-forth boxing match. But his speech on Friday implicitly blamed the trade war for aggravating a global economic slowdown that has weakened U.S. manufacturing and business investment, clouding an otherwise solid domestic outlook.
While Mr. Powell never mentioned the president by name in his speech, former Fed Vice President Stanley Fischer said at a later event here that the greatest threat to the international monetary system rested with Mr. Trump’s behavior. The president is “trying to destroy the global trading system,” Mr. Fischer said at a presentation by Bank of England Gov. Mark Carney.
“We are in a system in which things are getting worse day by day,” said Mr. Fischer, who served as Fed vice chairman from 2014 to 2017 and before that served as governor of the Bank of Israel. “It’s not a service to anybody at least privately to not focus on what the key problems are. And that would be the behavior of the United States, unfortunately.”
Mr. Carney acknowledged the scale of challenges facing global policy makers as a result of Mr. Trump’s trade policies. “Without question the euphemism of trade tensions doesn’t do justice to the scale of the impact of recent trade actions—actual and potential—and, to some extent…the fundamental challenge to the nature of the trading system,” he said.
Relative to the Fed’s goals of seeking stable inflation and healthy labor markets, the U.S. economy “is now in a favorable place,” Mr. Powell said. But he said Fed officials were monitoring significant risks facing the economy.
Mr. Powell cataloged a series of concerning geopolitical events that have contributed to a volatile three-week period for global financial markets since the Fed cut rates at its July 30-31 meeting.
These included Mr. Trump’s announcement the day after the meeting that he planned to impose new tariffs on $300 billion in Chinese goods that weren’t already subject to tariffs.
The Fed chief also notedrising tensions in Hong Kongand the prospect of amessy divorce between the U.K. and the European Union.Global manufacturing surveysindicated industrial production in more countries has been falling to levels associated with contraction, with declines in large economies in Germany and China weighing heavily on markets.
“Financial markets have reacted strongly to this complex, turbulent picture,” Mr. Powell said. And this leaves the Fed in uncharted policy territory, he said.
“We have much experience in addressing typical macroeconomic developments under” the central bank’s policy-making framework, he said. “But fitting trade policy uncertainty into this framework is a new challenge.”
Mr. Powell’s speech reflected the view of many of his Fed officials, who were split over last month’s decision to lower their policy rate for the first time since 2008. They have increasingly hinted that the Fed’s monetary policy isn’t responsible for the recent turmoil, even though several officials, including Mr. Powell, have said it may require the Fed to continue with rate cuts.
Some bond investors were jarred when Mr. Powell pushed back last month against market expectations of a more aggressive series of stimulus measures.
He suggested Friday that bond-market expectations of additional cuts had buoyed the U.S. economy and markets, suggesting that failing to meet those expectations could weaken the outlook somewhat.
Mr. Powell’s speechillustrated how officials believe their policy approach has been handicapped by Mr. Trump’s trade tactics, said
chief U.S. economist at Pantheon Macroeconomics, who echoed sentiments shared by foreign central bankers on the sidelines of Friday’s conference in Wyoming.
“We don’t envy Mr. Powell and his colleagues right now,” Mr. Shepherdson wrote. “All their analysis and forecasts can be upended by a single tweet, so the policy-making process has been wrecked, even without the overlay of the president railing at the Fed.”
By effectively placing responsibility for the fallout of the trade war on the Trump administration and not the Fed, Mr. Powell indicated a greater effort by the central bank “to be clear in public as to what it can and cannot do with regard to trade wars, though this comes with a cost in terms of potentially dampening the efficacy of the Fed’s own actions,” said
vice chairman of Evercore ISI.
The Fed in July lowered its policy rate to a range between 2% and 2.25%.
Mr. Carney in his presentation warned that global growth was slowing amid trade tensions that could “prove more pervasive, persistent and damaging than previously expected.”
Mr. Carney echoed Mr. Powell’s caution about the limits of monetary policy in addressing geopolitical shocks—in his case, by focusing on the prospect that the U.K. crashes out of the European Union without a separation agreement.
“In the end, monetary policy can only help smooth the adjustment to the major real shock that an abrupt ‘no deal Brexit’ would entail,” he said.
Mr. Carney said there was “overwhelming evidence” that uncertainties over London’s future relationship with Brussels had held back business investment in recent years despite otherwise favorable economic and financial conditions.
“It serves as a warning to others of the potential impact of persistent trade tensions on global business confidence and activity,” he said.
Write toNick Timiraos at[email protected]
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