Jul 12, 2019

Four Takeaways from Chairman Powell’s Testimony

David Beckworth Senior Research Fellow , Christian McGuire Staff writer

Earlier this week, Chairman Powell testified before the House of Representatives Financial Services Committee. His testimony is being eagerly dissected by commentators seeking insight into upcoming Fed actions. Here are four of the essential takeaways:

1. New Economic Doubts Make a Rate Cut More Likely

Chairman Powell noted that "crosscurrents have reemerged" since the May Federal Open Market Committee (FOMC) meeting. Specifically, trade uncertainty, slowing global growth, and muted inflation seem to have made the Fed less bullish about economic growth.

These words confirmed the market’s expectation that the Fed will cut interest rates in July to boost investment. Financial markets have reacted positively to this news, and a rate cut would probably take some pressure off the dollar. 

2. But the Decision Won’t Be Easy

Despite this new information, the decision to cut rates in July will not be an easy one. President Trump has often publicly called upon the Federal Reserve to cut rates, and the Fed doing so now may undermine the perception of its independence from politics.

Further, crosscurrents notwithstanding, the economy is still pretty strong. It isn’t obvious that further stimulus is really necessary, so there isn’t a slam dunk case to cut rates. The best argument is the rate hike will be an insurance cut against the possibility of economic downturn in the future. 

3. A Major Concession of a Fed Mistake

Chairman Powell conceded that the Fed’s estimate of a safe speed limit for the economy over the past five years has been wrong. He was asked if the Fed underestimated how low the unemployment rate could go before the economy began to overheat, starting back in 2014.  The Chairman responded with “absolutely.”  This implies the Fed’s rate hikes got ahead of the recovery.

4. New Strategies or Tools?

Powell also mentioned that the Fed is reviewing its strategy and tools. This could have huge implications for policymaking and the economy. If the Fed changes how it does monetary policy and adopts new tools, it might dramatically affect American monetary policy. For example, one proposal under Fed consideration is to move away from its current inflation target to a nominal GDP target. There are good reasons to pursue this change, as outlined in this article.

Conclusion

While Chairman Powell’s testimony did not announce any major decisions, his comments shed some light on the complex decisions that American central bankers face going into the future.

Photo credit: BRENDAN SMIALOWSKI/AFP/Getty Images

Support Mercatus

Your support allows us to continue bridging the gap between academic ideas and real-world policy solutions.Donate