Powell defends Fed move, won’t commit on future moves

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Federal Reserve Board Chair Jerome Powell defended the Fed’s 25 basis point rate cut in the face of a resilient economy and refused to speculate about future moves.

With U.S. economic growth remaining healthy and the outlook also good, Powell was grilled by reporters over whether he thought the rate cut would do anything to spur the economy.

Powell said asking about the rate cut “was not the right question” and the actions the Fed have taken this year were made to “insure against downside risks” support economic growth and move inflation up to the Fed’s 2% target.

He stressed the Fed has not moved from being data dependent to being more worried about trade tensions, calling the cut “a mid-cycle adjustment to policy” not a change from data dependency.

Powell suggested he doesn’t believe this is the first cut in an extended easing cycle. He also indicated the cut isn't necessarily the only one, as any future rate reductions would be based on incoming economic data. For now, he said, the outlook suggests it’s “appropriate to make an adjustment in policy to a somewhat more accommodative stance.”

In a statement before taking questions, Powell said the 25 basis point cut to lower rates to 2% to 2.25% and ending the runoff of the balance sheet in August instead of September were in response to the negative effects of trade tensions.

The decision was opposed by Federal Reserve Bank of Boston President Eric Rosengren and Federal Reserve Bank of Kansas City President Esther George, who dissented in favor of keeping rates unchanged.

Compensation costs

Compensation costs for civilian workers rose 0.6% in the second quarter on a seasonally adjusted basis after rising 0.7% in the first quarter, the Labor Department reported. Economists surveyed by IFR Markets had expected a gain of 0.7% for the employment cost index.

Overall wages and salaries increased 0.7% in the second quarter while benefit costs gained 0.5%, Labor said.

Private sector employment increased 156,000 in July after rising 112,000 in June, according to data in this month’s ADP National Employment Report.

Economists surveyed by IFR Markets had expected a gain of 150,000 for the month.

“While we still see strength in the labor market, it has shown signs of weakening,” said Ahu Yildirmaz, vice president and co-head of the ADP Research Institute. “A moderation in growth is expected as the labor market tightens further.”

Mark Zandi, chief economist of Moody’s Analytics, said, “Job growth is healthy, but steadily slowing. Small businesses are suffering the brunt of the slowdown. Hampering job growth are labor shortages, layoffs at bricks-and-mortar retailers, and fallout from weaker global trade.”

The Chicago Business Barometer, produced with MNI, eased to 44.4 in July from 49.7 in June, the second sub-50 reading in 30 months.

Economists surveyed by IFR Markets had expected the index to rise to 51.0 in July.

Weaker demand and production led firms to adjust their workforce, MNI said, as the employment indicator fell into contraction for the first time since October 2017 and hit the lowest level since October 2009.

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Monetary policy Economic indicators Jerome Powell Federal Reserve FOMC