Thu, Oct 10, 2019 - Page 10 News List

US Fed boss in possible hint at interest rate cuts


US Federal Reserve Chairman Jerome Powell speaks at the National Association for Business Economics conference in Denver, Colorado, on Tuesday.

Photo: AP

US Federal Reserve Chairman Jerome Powell on Tuesday said that US job growth since early last year was not as robust as thought, a hint that the Fed might be ready to cut interest rates to support the US economy.

Powell also said that the Fed would soon announce plans to buy US Treasuries, likely short-term bills, to try to pump more cash into overnight money markets.

The goal is to keep short-term interest rates at their target level and it is not needed to support the US economy, he said.

Downward revisions to the government’s hiring data, announced in August, suggest less upward pressure on wages and inflation.

“Where we had seen a booming job market, we now see more moderate growth,” Powell said in a speech at an economic conference in Denver, Colorado.

The Federal Reserve raised its benchmark short-term interest rate four times last year, ending at a range of 2.25 to 2.5 percent.

The reasoning behind the rate increases was based in part on the notion that brisk hiring would enable workers to secure higher pay, which would ultimately lead to higher inflation. Yet so far, the pace of income gains and price increases has been modest.

Since the start of this year, the Fed has reversed two of those increases and investors expect a third rate cut later this month.

In his remarks, Powell addressed the upheaval that occurred in a vital corner of the financial system last month.

A shortage of funds in overnight lending markets used mostly by banks lifted the Fed’s rate above the top of its target range. Corporate tax payments due at the end of the quarter and bond sales by the federal government had soaked up so much cash as to send overnight rates sharply higher.

To try to prevent that from recurring, Powell said that the Fed is considering buying US Treasuries.

Typically, the Fed creates new currency to make such purchases, which boosts cash reserves available in short-term lending markets.

“Neither the recent technical issues nor the purchases of Treasury bills we are contemplating to resolve them should materially affect” interest rate policy, Powell said.

The move is a tacit admission by the chairman that the Fed let the level of cash reserves fall too low.

Oxford Economics has forecast that the Fed would have to buy about US$480 billion of Treasuries over the next two years to meet the demand for cash in short-term lending markets.

During the Great Recession and its aftermath, the Fed bought more than US$1 trillion of Treasuries and mortgage bonds to try to lower longer-term loan rates to encourage more borrowing and spending.

The central bank dubbed the program “quantitative easing” (QE).

In this case, Powell said that unlike QE, the forthcoming purchases are not intended to stimulate the US economy.

“This is not QE,” he said. “This is nothing like it at all.”

Powell did not directly address the Fed’s next steps on interest rates, but said the central bank “will act as appropriate” to support the economy and hiring.

Powell also acknowledged that the Fed now recognizes that the unemployment rate can fall lower than it previously thought without sparking high inflation.

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