Fed Chair Powell: Core view on the economy unchanged – Westpac

Elliot Clarke, Research Analyst at Westpac, notes that in the US,  Chair Powell appeared before the US Congress  in his semi-annual testimony and the core view on the economy was unchanged, a ‘just right’ combination of robust confidence in economic momentum and little concern over inflation.

Key Quotes

“The consequence for policy is that “the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate”. The inclusion of “for now” emphasises clearly that the outlook is not entirely benign.”

“Risks remain. On the financial front, it is best to hold that risks will be reacted to only as they manifest. Financial conditions and stability are seen as “normal” despite some assets being priced at elevated levels. Comments on the yield curve were also non-threatening.”

“The risks to watch more closely then are those tied to the real economy, particularly current trade tensions. Most notable from the Q&A was the comment from Chair Powell that the FOMC had evidence of capital expenditure plans being “put on ice”. If we are correct in anticipating decelerating support for growth from the consumer, then to sustain GDP growth near 3.0% past Q2, business investment must remain strong.”

“The building evidence however is that this open-ended uncertainty around trade may preclude it. Government spending would then be left as the prime contributor to momentum from late-2018, setting the US economy up for a very sharp growth slowdown in 2019 – even absent a material shock to household incomes and confidence.”