Fed chairman Powell provokes Trump with warning on 'unsustainable' government debt

Federal Reserve Chair Jerome Powell reaffirmed that the central bank is on hold after cutting the benchmark lending rate three times this year. — Reuters pic

Federal Reserve Chair Jerome Powell reaffirmed that the central bank is on hold after cutting the benchmark lending rate three times this year. — Reuters pic

Federal Reserve chief Jerome Powell reaffirmed to the US Congress that the central bank is on hold after cutting the benchmark lending rate three times this year.

Breaking with more than a quarter century of precedent, Trump has repeatedly lambasted the Fed and accused it of keeping credit too tight, most recently on October 31, the day after it reduced rates for the third time this year.

"Our economy is in a strong position", he said.

Sal Guatieri, a senior economist at BMO Economics, says Powell "stayed true to the patience script" by indicating that that the Fed's key policy rate is likely to remain unchanged for an extended period unless economic risks increase.

Federal Reserve Chairman Jerome Powell discusses the possible explanations for the economy experiencing a slower rate of wage growth than might otherwise have been expected.

"Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric two per cent objective as most likely", Powell said. While many presidents may have been unhappy with Fed policy, none have been as vocal about it as Trump.

Having guided interest rates lower this year and declared a stopping point, Federal Reserve officials face a potentially volatile election-year problem if USA job growth slows in the coming months as many expect it will.

After three rate cuts this year, the Fed signalled at its policy meeting last month that it was likely done for now, leaving its overnight target interest rate in a range of between 1.50% and 1.75%. "The bar's already set very high for them to cut rates", she said.

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Inflation, according to the Fed's preferred gauge, is just 1.3%, though it has been held down in recent months by lower energy costs and most Fed officials expect it to move higher in the coming months. "It also may be that the neutral rate of interest is lower than we have been thinking and that therefore our policy is less accommodative than we have been thinking".

Manufacturing and business investment continue to lag.

He also flagged his concerns about an "unsustainable" government budget and "high and rising debt", which could limit policymakers' ability to boost spending as needed in an economic downturn.

"The US economy can operate at a much lower level of unemployment than many would have thought".

"We're paying actually high interest".

Many Fed officials in public comments this month have voiced support for Fed policy and have expressed confidence in the economy.

Powell repeated in his testimony that the Fed was unlikely to use its remaining capacity to cut rates unless there is a "material reassessment of our outlook".

A downshift in monthly job growth on its own would not qualify, one Fed regional banker said on Tuesday, outlining how the Fed may be forced to explain in the midst of a likely intense presidential campaign why a slowdown in one of the country's most closely watched economic metrics is not necessarily a bad sign.

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