Powell Can’t Ignore the Elephant in the Room Forever

For all the importance of China’s subpar recovery, the country's woes are notably absent from the plethora of projections and commentary that flow from the Federal Reserve these days. Judging from recent remarks, there's either no problem or nothing sufficiently grave to prod Chair Jay Powell to hint at switching gears. Give it time.

Such an enormous cog in the world’s commercial and financial ecosystem doesn’t stumble without the pain being spread around. The Fed's mandates for price stability and maximum employment come from Congress, the most parochial of institutions. This hasn't prevented the central bank acknowledging deteriorating conditions abroad and, in some circumstances, pivoting to an easier stance or foregoing hawkish measures. That's been the case on several notable occasions in the past quarter century: the Asian financial crisis, the Russian default that soon followed, Europe’s debt crisis — and Beijing’s poorly-handled currency devaluation in 2015.

There’s slim chance of an immediate replay. Inflation is coming down, but remains too high for comfort. With no sense that the international economy is precipitating an immediate crisis, the Fed is loath to focus on much beyond US shores. Anything that whiffed of China figuring in deliberations would be difficult to justify to lawmakers, for whom opposition to all things China is about the only remaining bipartisan cause. While the Fed sets interest rates independently, it cares greatly about sentiment on Capitol Hill.

Fielding a question on risks to the outlook during his press conference last week, Powell ticked off the strike by autoworkers, the prospect of a government shutdown, higher oil prices, even the resumption of student loan payments. He could have mentioned China or, more euphemistically, stagnating conditions overseas. Powell demurred.

The Fed chair appears to be an outlier among central bankers. (Minutes from the Federal Open Market Committee's September meeting will be released in about two weeks. They may shed light on what was discussed.) The European Central Bank isn't so reticent.