Powell gives testimony

26 July, 2018

The U.S. Federal Reserve Governor, Jerome Powell, gave his two-day testimony to the U.S. Congress last week. In this testimony, Powell cautioned that the escalating trade tensions, especially between the U.S. and China could impact growth.

He said that the results of higher tariffs could hit growth not just in the U.S. but also its trading partners as he said that he did not view the European Union as a "foe" contrary to the comments by the U.S. President Trump.

Giving his semi-annual testimony to the Senate banking committee, the Fed chair said that the growth in the United States would partly be determined by the impact and the outcome of the trade battle with the U.S. He also said that other factors include the U.S. tax cuts and the government's spending bill.

Speaking about the U.S. labor markets, Powell said that the U.S. jobs market continued to strengthen and that the central bank officials believed that for now, it was best to maintain a tightening cycle by raising interest rates at a gradual pace.

Powell, however, said that there was no precedent for the current trade discussions as he criticized the U.S. administration's protectionist policies.

The Fed Chair Powell said that many countries were open to trade despite the developments and have not yet introduced trade barriers or tariffs. He said that countries that have protectionist policies had done worse.

Mr. Powell said that the Fed's role was limited. He reminded the Senate committee that "we don’t do trade policy. That’s Congress and the administration."

The Fed chair once again reiterated that he did see the EU as a foe to the U.S. contrary to the comments made by President Trump in an interview recently. He said that the current rules-based system was set up by the United States itself after World War 2 and that it had served the U.S. very well.

The Fed chair said that the risks to the economy was roughly balanced and cited optimism that the U.S. economy could grow faster than expected. He added that investment by businesses was also rising at a healthy pace.

But the Fed Chair also said that businesses were concerned about the impact from the trade policies.

The Fed chair was confident about growth and said that the U.S. economic growth advanced strongly in the second quarter of 2018. This was attributed to the robust gains from the labor market and rising incomes after tax and the overall optimism among the households.

Powell said that the U.S. economy was on average adding 215,000 jobs each month during the first half of the year.

"The unemployment rate is low and expected to fall further. Americans who want jobs have a good chance of finding them. Moreover, wages are growing a little faster than they did a few years ago," Powell said in his prepared testimony to the Senate banking committee.

The Fed Chair's testimony comes following the June jobs report where the U.S. unemployment increased. The unemployment rate briefly increased to 4.0% from 3.8% previously. For the first half of the year, the unemployment rate averaged 4.0%.

Inflation, as measured by the consumer price index was seen overshooting the Fed's target rate of 2.0%. This was attributed to higher fuel prices as it pushed the annual inflation rate to 2.3% for the year ending May 2018.

Powell, however, noted that the core inflation rate which excludes the volatile food and energy prices remained at 2.0% and was in line with the central bank's target.

"With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that, for now, the best way forward is to keep gradually raising the federal funds’ rates," Powell said.

The central bank raised rates two times this year and signaled two more rate hikes for the remainder of this year. Markets are pricing in the next two rate hikes at the September and December FOMC meetings.

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