So the net effects of the policies, if enacted as Trump has described them, is anyone’s guess until they eventually show up in the data.
While Powell was understandably reluctant to comment on Trump’s policies, saying he wanted to avoid talking even indirectly about the conduct of tariffs, he did say that “things are a little different” now compared to the economic conditions that were the backdrop to Trump’s first term, when he initiated trade wars with China and Europe.
‘We study the data, we analyse how it will affect the outlook and the balance of risks, and we use our tools to try, given our best understanding to achieve our goals. That’s what we do … Don’t look for us to do anything else.’
Fed chair Jerome Powell
Inflation is higher, trade relations are different and “the range of possibilities is very, very wide”, he said, although he acknowledged that during Trump’s first term, there was some evidence that US businesses had cut back their investment during the trade wars.
For a data-dependent and driven institution like the Fed, that “range of possibilities” at the start of Trump’s new term as president – he appears to have a far more developed, detailed, radical and disruptive agenda this time than he did in 2016 – means the best strategy is to watch and wait while keeping all options – holding rates steady, cutting or even hiking them – open. And that appears to be the stance it has adopted.
While Powell downplayed its significance, Fed watchers, attuned to the precision with which the Fed chooses the language in its formal statements on monetary policy, saw an omission of the Fed’s usual reference to making progress on inflation as an indicator that the central bank, which cut rates three times (by a percentage point) in the final quarter of last year, has now tilted slightly “hawkish”.
That caused share prices to fall on Wall Street slightly and bond yields to rise slightly.
Loading
Where some in the markets were still hanging onto the hope that the Fed might cut rates again at its March meeting, the overwhelming expectation now is that, if there are to be any further cuts to rates, the first of the two cuts that futures markets have still pencilled in won’t come before June.
By then, of course, the Fed – and the rest of us – would have a somewhat clearer view of what Trump is actually doing, some sense of the likely effects of his policies and a better understanding of the responses to them, particularly from the trade partners hit by any US tariffs.
His first 10 days in office have involved a frenzy of executive orders, a flurry of court challenges to them (some appear blatantly unconstitutional), orders issued and rescinded and threats of tariffs (on imports from Colombia) made and withdrawn.
Trump, who claims to understand interest rates better than Powell and his colleagues, has said he plans to speak to the Fed chair “at the right time” and that Powell will listen to him. Powell said on Wednesday that he had yet to have any contact with the president.
Trump has linked his “demand” for the Fed to lower US interest rates to oil prices, saying he will ask Saudi Arabia and OPEC to bring oil prices down while unleashing a boom in oil and gas production in the US via deregulation in line with his “drill, baby, drill” mantra.
He hasn’t explained why he thinks the OPEC members would agree to reduce their already depressed oil revenues – or why, with the US domestic oil price already below $US73 a barrel and sliding, US producers would go on a drilling frenzy to deplete their already diminishing resources, or why Wall Street investors would tolerate a resurgence of suboptimal activity in the sector.
Despite his view of his own expertise in understanding interest rates, it also appears to have escaped the US president that the Fed doesn’t focus on headline inflation, which includes volatile energy and food prices, but on measures that exclude them.
Loading
While headline inflation has been gradually trending down towards the Fed’s target of 2 per cent, “core” inflation rates have been stickier. There’s a personal consumption expenditure index reading scheduled to be released on Friday, which will give the Fed a better insight into how inflation is tracking.
Powell wouldn’t be drawn on questions based on Trump’s comments, saying he wouldn’t react to or discuss anything an elected politician might say, and reasserting that the Fed would continue to operate independently of politics and base its decision solely on what is happening in the economy.
“This is who we are, this is what we do,” Powell said.
“We study the data, we analyse how it will affect the outlook and the balance of risks, and we use our tools to try, given our best understanding, our best thinking, to achieve our goals.
“That’s what we do, that’s always what we do. Don’t look for us to do anything else.”
For anyone but Trump, that’s what you’d expect a seasoned and independent central banker to say.
The Market Recap newsletter is a wrap of the day’s trading. Get it each weekday afternoon.
