November 15, 2019
By Paul Bubny
“The U.S. economy is the star economy these days,” Federal Reserve chairman Jerome Powell told the House of Representatives Budget Committee. “We’re growing at 2%, right in that range, more than any of the other advanced economies are growing. There’s no reason that can’t continue.”
Powell’s testimony before the Budget Committee and the Joint Economic Committee made the case for taking a breather on further cuts to the federal funds rate—unless there’s a sudden change in current conditions.
The central bank’s Federal Open Market Committee has lowered the federal funds rate by a total of 0.75 points since July, and Powell noted that monetary policy operates on a lag.
“The full effects of these adjustments on economic growth, the job market and inflation will be realized over time,” he testified. “We see the current stance of monetary policy as likely to remain appropriate as long as incoming information about the economy remains broadly consistent with our outlook of moderate economic growth, a strong labor market and inflation near our symmetric 2% objective.”
The U.S. economy, Powell told lawmakers, is now in the 11th year of the current expansion, “and the baseline outlook remains favorable. Gross domestic product increased at an annual pace of 1.9% in the third quarter of this year after rising at around 2.5% rate last year and in the first half of this year.”
The moderate Q3 reading is partly due to the transitory effect of the United Auto Workers strike at General Motors, said Powell. “But it also reflects weakness in business investment, which is being restrained by sluggish growth abroad and trade developments. These factors have also weighed on exports and manufacturing this year.”
Asked whether the sluggishness in manufacturing could spill over into the broader economy, Powell told Congress that Fed officials haven’t seen that yet. “The 70% of the economy that is the consumer is healthy with high confidence, low unemployment, wages moving up.”
Long term, Powell said a sustained expansion of economic activity, a strong labor market, and inflation near the Fed’s symmetric 2% objective were most likely, especially since the moderate pace of growth means no overheating. “This favorable baseline partly reflects the policy adjustments that we have made to provide support for the economy,” he said.
He noted, though, that “noteworthy risks” to this outlook remain. In particular, sluggish growth abroad and trade developments have weighed on the economy and pose ongoing risks. Moreover, inflation pressures remain muted, and indicators of longer-term inflation expectations are at the lower end of their historical ranges.
“Persistent below-target inflation could lead to an unwelcome downward slide in longer-term inflation expectations,” Powell continued. “We will continue to monitor these developments and assess their implications for U.S. economic activity and inflation.”
One area in which Powell sounded a note of caution was the current federal budget, which he said was “on an unsustainable path, with high and rising debt.” This could have long-term implications in terms of restraining fiscal policymakers’ willingness or ability to support economic activity during a downturn.
“In addition, I remain concerned that high and rising federal debt can, in the longer term, restrain private investment and, thereby, reduce productivity and overall economic growth,” said Powell. “Putting the federal budget on a sustainable path would aid the long-term vigor of the U.S. economy, and help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy if it weakens.”
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