Fed Chairman confirms current monetary course

Yesterday’s hearing of Fed Chairman Jerome Powell as part of the six-monthly monetary policy report before the Senate’s banking committee was eagerly awaited. In his opening speech, Powell was optimistic about the economic development. He believes that the solid growth rate this year so far is attributable to several factors: robust job growth, rising after-tax incomes and optimism among private households. Backed by a strong labour market, inflation close to the two percent target and balanced risks for the growth outlook, the FOMC considers further interest rate hikes to be the best monetary course – at least for now. Powell’s parenthetical „for now” can be interpreted to mean that the course of monetary policy has not been switched to autopilot. In other words, key interest rates will not be raised as a matter of course but in consideration of the current underlying conditions.

More interesting than the prepared opening speech were the questions of the senators and Powell’s answers to them. Numerous questions were raised about the possible effects of the trade conflict, with the Chairman of the US Federal Reserve making a clear commitment to free trade in goods. Countries that did not impose tariffs or tariff barriers were able to grow faster, Powell said, adding that these countries achieved higher national income and higher productivity compared with countries that took a protectionist approach and generally faired less well. When asked to what extent the current good performance of the US economy was attributable to Donald Trump’s tax relief, he avoided giving any explicit answer and merely stated that it was not possible to clearly demarcate the numerous positive effects. When asked whether he regarded the European Union as an economic enemy, he responded with a quick and unequivocal „no“. However, he sidestepped questions about the flattening of the yield curve. Powell explained that this is an issue for the FOMC but that a possible inversion of the yield curve should not necessarily be taken as an indication of a recession. More important is determining where the neutral interest rate lies. Last but not least, regulation was also a major issue. Here Powell repeatedly stated that the Fed does not intend to reverse regulation for large financial institutions.

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