Jerome Powell: The US economy is in a favorable position, but it faces risks

Federal Reserve Governor Jerome Powell says the US economy is in a favourable position but faces “significant risks” as other economies in the world slow down amid trade uncertainty.

“The uncertainty in trade seems to play a role in global slowdowns and weak industrial production and capital expenditures in the US”, said Jerome Powell in a speech to central bankers who hold their annual economic forum in Jackson Hole, Wyoming. “We will take appropriate action to support strong growth in the labour market and inflation near the 2% target”, added he.

US indexes have capped the losses and yields on sovereign bonds have increased since Powell’s speech, as investors took it as an open door to a new fall in interest rates at a Fed meeting next month.

Last month, the central bank cut interest rates for the first time in more than ten years, citing slowing global economic growth and low inflation. Powell then described the interest rate cut as “mid-cycle adjustment” and added that this was not the beginning of a long series of cuts.

In his statement today, however, Powell noted that the events following the meeting were remarkable.

“We see new signs of a slowdown in the global economy, especially in Germany and China. The news is full of geopolitical events, including the growing opportunity for a Hard Brexit, the escalating tensions in Hong Kong and the collapse of the Italian government”, said Jerome Powell, adding that US President Donald Trump’s resumption of a trade war with China. Earlier today, the Asian side announced new countermeasures.

“In general, anything that affects employment and inflation prospects can also affect the relevant monetary policy stance and may include uncertainty about trade policy. But there are no precedents in the recent past to guide the political response in the current situation”, said the Fed Governor.

The investors are betting on a new cut in interest rates by a quarter-point at the Federal Open Market Commission meeting on September 17 and 18. Powell’s statement indicates that the commission remains in an increased risk management mode.

“We are closely watching developments and weighing their implications for the prospects for the US economy and the path of monetary policy”, said the Fed’s governor.

He reviewed US monetary policy since World War II, dividing his analysis into three questions: Can the central bank contain inflation? Can the central bank alleviate unavoidable financial instability? Can the Central Bank still provide incentives and counter-cyclical policies at very low interest rates?

Powell answered the first two questions, stating that the Fed has the tools to cushion inflation, although the post-crisis financial system is more resilient and monitoring has improved. Work is still underway to answer the third question, he added.