Powell says wait-and-see on coronavirus

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Federal Reserve Board Chairman Jerome Powell stuck to his message in questioning before members of the House Financial Services Committee: the economy is doing well and the Fed will stay on the sidelines unless there is a “material change” to its forecast.

Repeating his mantra that the economy is in “a good place” and “performing well,” the chairman brushed off fears of the coronavirus.

In his remarks before the questions, Powell said, “we are closely monitoring the emergence of the coronavirus, which could lead to disruptions in China that spill over to the rest of the global economy." When asked about the illness, Powell explained it’s “too early to say” what the impact on the U.S. economy will be, but the question is whether the effects will be persistent, which would require Fed action.

Federal Reserve Board Chair Jerome Powell testified before the House Financial Services Committee on Tuesday.

Powell added, “There’s no reason why the expansion can’t continue.”

In his statement, the chair said the Fed expects inflation to move closer to 2% in the next few months after “unusually low readings from early 2019 drop out of the 12-month calculation."

And about the other mandate, full employment, he said in response to a question, "We're never going to say we've accomplished that goal."

When asked, he said if a downturn were to occur, the Fed would “rely on tools we did use,” rather than negative interest rates, although the Fed will monitor the countries that are using sub-zero rates to see how they work.

Many Representatives asked about climate change. Powell said the Fed’s forecasts look just a few years into the future, and mostly for a single year ahead, while “climate change operates on a longer cycle than that.”

Responding to a question about past Fed moves, Powell said he backed the rate hikes and cuts of the past two years and would not now reconsider his decisions, since they were made with the information that was available at that time, adding, "history will be the judge."

Powell defended himself when questioned about the optics of attending a party thrown by Jeff Bezos after the annual Alfalfa Club dinner, which Trump family members attended, saying he didn’t speak to any of them and was there with his son and his new daughter-in-law.

As for the Dow Jones Industrial Average dropping while he spoke, and President Trump’s tweeting that fact, Powell said, “I’m not following the market as I sit here answering your questions."

On Monday, Federal Reserve Bank of Philadelphia President Patrick Harker also said the U.S. economy is in “good shape,” and espoused a view that rates should stay where they are.

“My own view right now is that we should hold steady for a while and watch how developments and the data unfold before taking any more action,” he said in a speech, according to prepared text released by the Fed.

Continued job gains and rising wages should boost consumer spending this year, despite soft business investment. He also said it is “too early” to determine what the impact of the coronavirus will be.

Separately, on Tuesday, Federal Reserve Bank of St. Louis President James Bullard said the Fed has “a reasonable chance” to achieve a soft landing.

Three questions will determine whether it is possible, he noted: if “global trade policy uncertainty has sufficiently been dampened to now encourage global manufacturing”;
“interest-sensitive sectors in the U.S. will respond to the 2019 change in U.S. monetary policy”; and “ whether the coronavirus outbreak in China is likely to be contained as other viral outbreaks have been.”

“The answer to all three questions,” he said, “is, ‘Let’s wait and see.’”

On Monday, Federal Reserve Bank of San Francisco President Mary Daly addressed the problem of combating possible economic downturns when the fed funds target is quite low.

She said inflation will have to be pushed up, which “will not be easy,” but the Fed has “the tools we need.” The problem is, “having the tools and actually being willing to use them are two very different things,” she said, according to prepared text released by the Fed. “And with very limited experience using these tools in this way, we feel uncertain. We’ve exercised the muscle of pushing inflation down for so long that changing direction feels unnatural. But that is exactly what we will need to do. We need to embrace the mindset that inflation a bit above target is far better than inflation a bit below target in today’s economic environment."

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Federal Reserve FOMC Jerome Powell Federal Reserve Bank of St. Louis Federal Reserve Bank of San Francisco Federal Reserve Bank of Philadelphia Mary Daly Patrick Harker James Bullard