Fed's Powell offers sharp but nameless rebuke of Trump's calls for rate cuts: Don Pittis

Canadian borrowers may have heard a whisper in favour of lower interest rates yesterday, as U.S. Federal Reserve chair Jerome Powell did not rule out an interest rate cut if inflation stays low.

But so far, the world's most powerful central banker said he would continue to be patient, holding rates steady as he waits for more data on the direction of the economy.

The question is, how much patience can U.S. President Donald Trump stand?

After repeated calls for interest rate cuts, the president was thwarted once again by the man he appointed as chief central banker.

Reporters asked Powell what he would do if inflation remains as low as it is right now, around 1.5 per cent. Would he cut interest rates in order to stimulate the economy and inflation?

Knowing that a few loose comments from a central banker can launch a thousand headlines, Powell was cagey. Despite repeated questions from the assembled business press, the words "rate cut" remained unsaid.

"To go back to your question, if we did see ... inflation persistently below [target], then that is something the committee would be concerned about and something that we would take into account in setting policy," Powell told reporters.

Stubbornly low inflation

Essentially, the concern he was addressing was the stubbornly low inflation that has continued even while many other economic indicators have been surging ahead.

Even last year, while unemployment was sinking to new lows and tax cuts and government spending were pushing the economy to new highs, inflation remained decidedly moderate.

As Powell reiterated yesterday, the central bank's twin goals are to keep employment strong and inflation centred between one and three per cent. But as members of the business media pointed out, even at its recent highs, inflation has really never risen above the middle of that range.

And Powell admitted that persistently low inflation could be unhealthy. As one Canadian economic researcher has shown, inflation is at least partly based on what people and businesses expect it to be.

"Inflation expectations could be pulled down and that could put downward pressure on inflation and make it hard for us to react to downturns," Powell said. 

However, the reason that Powell said he will remain "patient" is that he and his advisers believe the slump in price increases is transitory. In other words, several one-time declines in prices — including energy, airfares, and a new way of calculating the price of apparel — were not broad signals of inflation's path.

In fact, one indicator of core inflation, a measure that chops out the most and the least volatile goods, registered inflation of two per cent, he said.

Solid signs

Powell observed that the economy and job creation remain strong, that consumer spending would persist and strengthen, that household lending is sound and that financial markets are well placed to cope with any sudden downturn. He did not see a recession coming this year.  

Not only is the economy continuing to crank out jobs, but wages are on the way up, he said. The highest wage hikes are among people at the low end of the income range, something Powell spoke of approvingly.

Productivity, the amount of goods and services produced per person and a holy grail of economics, was also rising.

But if the bank does decide to cut rates, Powell made it very clear that it will not be due to badgering from Trump.

Both the president and his expected nominee for a seat on the Fed board of governors, Stephen Moore, have called on the Fed to not just cut rates but to cut by one full percentage point.

Speaking through an intermediary yesterday, Moore said that had he been a board member, he would have gone against the unanimous decision and voted for the cut that Trump requested, and thereby "help solve the Federal Reserve's groupthink problem."

Having a perceived Trump toady in his own ranks may not be a problem Powell will face. Some Senate Republicans who would have to approve his appointment have reportedly balked at Moore's possible candidacy, since it could politicize a studiously apolitical body.

'A non-political institution'

Associated Press reporter Martin Crutsinger put the question to Powell bluntly.

"You've repeatedly said that the Fed is going to conduct monetary policy without regard to outside political pressure, but it seems like the president is intent on increasing that political pressure," said Crutsinger, noting Trump's request for a one percentage point cut and a return to quantitative easing. "What do those comments do in affecting how you pursue policy and how you convey your decisions to the public?"

As he has responded to similar questions in the past, Powell was very careful not to mention the president by name. But his rejection of political interference in the bank's decision-making was unyielding.

"We are a non-political institution," Powell responded. "And that means we don't think about short-term political considerations. We don't discuss them and we don't consider them in making our decisions, one way or the other."

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