What Powell Said

In his speech at the Kansas City Fed’s annual monetary policy symposium in Jackson Hole, Fed Chair Powell discussed the challenge of keeping the U.S. economy “in a favorable space” in the face of significant risks. Minutes of the July 30-31 Federal Open Market Committee meeting had shown that officials were split on the appropriate course of action at that time. There was no presumption the further rate cuts would be required. However, trade policy uncertainty and concerns about the global economic slowdown have increased since the FOMC meeting, and Powell signaled that the central bank “will act as appropriate to sustain the expansion.”

How does the Fed make its policy decisions? Powell:

“Informingjudgmentsabouttheappropriatestanceofpolicy, the Committeedigestsabroadrangeofdataandotherinformationtoassessthecurrent state of the economy, the most likely outlook for the future, and meaningful risks to that outlook. Because the most important effects of monetary policy are felt with uncertain lags of a year or more, the Committee must attempt to look through what may be passing developments and focus on things that seem likely to affect the outlook over time or that pose a material risk of doing so. Risk management enters our decision-making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy, including the natural rate of unemployment and the neutral rate of interest. It will at times be appropriate for us to tilt policy one way or the other because of prominent risks.”

How does trade policy uncertainty fit into the Fed’s policy decisions?

“We have much experience in addressing typical macroeconomic developments under this framework. But fitting trade policy uncertainty into this framework is a new challenge. Setting trade policy is the business of Congress and the to use monetary policy to foster our statutory goals. In principle, anything that affects the outlook for employment and inflation could also affect the appropriate stance of monetary policy, and that could include uncertainty about trade policy. There are, however, no recent precedents to guide any policy response to the current situation. Moreover, while monetary policy is a powerful tool that works to support consumer spending, business investment, and public confidence, it cannot provide a settled rulebook for international trade. We can, however, try to look through what may be passing events, focus on how trade developments are affecting the outlook, and adjust policy to promote our objectives.”