Although Federal Reserve Governor Jerome Powell blamed President Donald Trump's trade policy for economic headwinds, which he says the central bank can do little to influence, the core of his comments was baked in the September quarter as investors expected.  While monetary policy is a powerful tool to support consumer spending, business investment and public trust, it cannot provide a definitive rulebook for international trade, Powell said at the Kansas City Fed's annual symposium in Jackson Hole, Wyoming. Markets seemed to agree.
later in the day after Trump threatened further action against China. But that doesn't mean investors are going to release the Fed from the hook.
Two-thirds of investors in the Fed Fund's futures expect at least one more quarterly cut in October following the expected reduction in the September quarter. And Powell is doing nothing to counteract that speculation. "We will act as appropriate to sustain enlargement," Powell said after his disclaimer on the limits of what monetary policy can do.
No one, of course, holds the Fed responsible for the trade war with China, nor for growing prospects for a no-deal Brexit, the economic downturn in China and Germany, the riots in Hong Kong or the Italian government's collapse in the litany of economic diseases cited by Powell. But he moaned about it and it seemed designed to prevent the Fed from being scapegoated by Trump, who still continued his attack on Fed policy on Friday, and wondered on Twitter whether Powell or Chinese leader Xi Jinping is the US's bigger enemy. .
Although the Fed's role is reactive, it has to respond to these macro events, and Powell does not relinquish this responsibility. "Committee members have generally responded to these developments and the risks they pose by shifting their forecasts for the current federal interest rate path," Powell said.
"Along with July's interest rate cuts, changes in the expected path have eased economic conditions and helped explain why the outlook for inflation and employment remains largely favorable."
The July meeting did not include the quarterly projections, including the dot -the plot graph for the federal fund rate forecasts, but June already showed a sharp reduction from March, with almost half of participants expecting a further cut to 1
This graph is almost sure to show a further lowering of expectations by September, perhaps in line with the market's slightly lower than even predictions of another two cuts, to 1.50-1.75 by the end of the year.
Some of the hawks in the Federal Open Market Committee (FOMC) has resisted further cuts, Cleveland Fed chief Loretta Mester said on the sidelines of the Jackson Hole conference that she believes interest rates are about this level now. She is not a voting member of the panel this year, but she said she was opposed to the rate cut in July along with the two disagreeable regional governors, Esther George of Kansas City and Eric Rosengren of Boston.
George and Philadelphia Fed chief Patrick Harker also expressed opposition to further cuts (Harker is a non-player this year). Dallas Fed chief Robert Kaplan, who is not a voter, sat on the fence and said he would prefer not to cut in September but would keep an open mind. St. Louis Fed President James Bullard, who is a voter and goes back and forth on cuts, said the reverse yield curve is not a good place to be and indicates a cut in the reference price.
Not that any of this really matters. Powell looks set to be put down and he wants five-member board member and New York Fed chief John Williams behind him, and obviously also Bullard's vote.
After that, the point is that the Fed has to play ball if the economy collapses for whatever reason. Beyond Powell's stop-and-go comments or regional executives' feelings, this is what investors are focusing on.