Jerome Powell has executed a fine pirouette. But he is going to need even more fancy footwork in the coming year
INTEREST RATES set by the Federal Reserve have been rising since 2015. The gradual approach, explained the Fed’s chairman, Jerome Powell, last September was intended to leave time to see how well the economy could absorb each hike. “So far the economy has performed very well, and very much in keeping with our expectations,” he said back then.
But businesses do not appear to share consumers’ confidence. Non-residential investment shrank in the second quarter of the year. Residential investment has fallen for six consecutive quarters. According to the Federal Reserve Bank of New York, investors are pricing government debt at a level that has historically been associated with a one-in-three chance of a recession within 12 months.
Finally, as Mr Powell emphasised on July 31st, inflation is uncomfortably weak. On a measure that excludes volatile food and energy prices, it sagged to 1.6% in June, well below the Fed’s 2% target. That has paved the way for members of the Fed’s rate-setting committee to adjust the path of interest rates downwards and to implement an “insurance cut”—a tactical reduction intended to keep the expansion alive. With interest rates so low, there is little room for an aggressive move.
A further cut would not be universally welcome. Catherine Mann of Citigroup, a bank, is sceptical that the latest round of monetary easing will boost business confidence enough to rekindle investment. Trade policy, not the cost of capital, is holding businesses back, she thinks. She fears that the Fed may be causing asset prices and the broader economy to move apart, generating risks to financial stability.
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