Federal Open Market Committee (FOMC) decided to kept the Fed Funds Rate at 0 - 0.25 percent, confirms the intention of the central bank to prop up the post-COVID-19 economy, said the central bank yesterday (06/10) - Photo by the Federal Reserve Office

JAKARTA (TheInsiderStories) – Federal Reserve (Fed) Chairman Jerome Powell hinted that the central bank is likely to keep its benchmark short-term interest rate unchanged in the coming months unless the United States (US) economy slows enough to cause Fed policymakers to make a “material reassessment” of their outlook.

But for now, in testimony before US’ Congress’ Joint Economic Committee on Wednesday (11/13), Powell expressed optimism about the US economy and said he expects it will grow at a solid pace, though it still faces risks from slower growth overseas and trade tensions.

“Looking ahead, my colleagues and I see a sustained expansion of economic activity, a strong labor market, and inflation near our symmetric 2 percent objective as most likely. This favorable baseline partly reflects the policy adjustments that we have made to provide support for the economy,” Powell said.

The Fed cut short-term rates last month for the third time this year, to a range of 1.5 percent to 1.75 percent.

Powell’s testimony comes a day after President Donald Trump took credit for an “economic boom” and attacked the Fed for not cutting interest rates further. Powell and other Fed officials, however, argue that their rate cuts, by lowering borrowing costs on mortgages and other loans, have spurred home sales and boosted the economy.

Powell was asked about negative interest rates, which Trump also called for Tuesday, and responded that they “would certainly not be appropriate in the current environment.” Negative rates occur “at times when growth is quite low and inflation is quite low, and you really don’t see that here,” Powell said.

Other Fed officials have also questioned whether cutting rates below zero has actually succeeded in boosting growth in places like Europe and Japan, where central banks have pushed rates into negative territory.

Powell repeatedly demurred when Sen. Ted Cruz, R-Texas, pressed him on how higher tax rates would affect the economy, including wealth taxes that have been proposed by Democratic presidential candidates Elizabeth Warren and Bernie Sanders.

But Powell did concede, under questioning from Cruz, that a ban on fracking would “not be a good thing for the economy.” Some Democrats have called for a fracking ban over environmental concerns about the controversial method for drilling for oil and gas.

Recent data suggests that growth remains solid if not spectacular. The economy expanded at a 1.9 percent annual rate in the July-September quarter, down from 3.1 percent in the first three months of the year. The unemployment rate is near a 50-year low of 3.6 percent and hiring is strong enough to potentially push the rate even lower.

Inflation, according to the Fed’s preferred gauge, is just 1.3 percent, 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.

Yet Powell reiterated that higher tariffs from the Trump administration’s trade war with China and uncertainty over potential future duties have caused many businesses to delay or cut back on their investment spending in large equipment and buildings. That has slowed economic growth.

Powell also urged Congress to lower the federal budget deficit so that lawmakers would have more flexibility to cut taxes or boost spending to counter a future recession.

“The federal budget is on an unsustainable path, with high and rising debt. Over time, this outlook could restrain fiscal policymakers’ willingness or ability to support economic activity during a downturn,” Powell said.

Powell also noted that with the Fed’s benchmark rate at historically low levels, the central bank will have less room to maneuver whenever the next downturn arrives. The Fed is exploring an alternative policy framework, Powell said, that it hopes will provide more flexibility. In typical recessions, the Fed cuts short-term rates by roughly 5 percentage points.

Powell reiterated that the Fed believes the unemployment rate could fall further without necessarily pushing inflation higher, a view that suggests the central bank is a long way off from hiking rates. Historically, super-low unemployment has been seen as likely to push up inflation, as workers push for higher pay and companies offer greater salaries to find and keep workers.

Powell’s testimony comes after many Fed officials in the past two weeks have voiced support for the Fed’s recent moves and expressed confidence in the economy. That contrasts with the Fed’s previous meetings when as many as three officials dissented.

Written by Lexy Nantu, Email: lexy@theinsiderstories.com