Tuesday’s meeting with Fed Chair, Powell, was dedicated to economic forecasts and monetary policy. Taking place at a very necessary time, the Fed had the opportunity to trace the dynamics of expectations and, if necessary, correct the interpretation of the last meeting. Powell eagerly took advantage of this opportunity, saying that the regulator is not going to respond to short-term fluctuations in market sentiment and the cost of credit in the economy.
“The Fed is insulated from short-term political pressure”, Powell said, hinting that the Fed is not going to blindly obey Trump’s calls for an aggressive rate cut. However, countering economic challenges, such as low inflation and the US trade confrontation on several fronts, remains a potential motive for easing credit conditions.
President of the Federal Reserve Bank of St. Lewis Bullard said he did not believe that the economic situation in the United States had deteriorated enough to consider the scenario of lowering the rate by 50 bp at once. However, a decrease by 25 bp seems quite appropriate and, at a meeting last Wednesday, Bullard voted for a rate cut.
Correction of expectations on Powell’s comments caused a strengthening of the dollar, due to the corresponding modest sell-off in the stock market and treasury bonds.
According to Powell, there is concern about the desynchronization of inflation expectations with the course of monetary policy. If inflation stays too low for too long, the Fed’s targets will lose confidence among households and firms (deanchoring expectations). This will cause a contraction in consumption and investment, and the economy as a whole will become less sensitive to possible stimulus. A good example of such a problem is Japan. A long-term trade standoff will hit consumer confidence and force them to further postpone the capital investment plans of firms.
It should be noted that signs of deterioration in consumer optimism are gradually emerging, in accordance with Powell’s concerns. The consumer confidence index, released on Tuesday, fell from 134.1 points to 121.5 points, while the consumer assessment indexes of the current situation and the future from the Conference Board also went down. Housing sales retain a downward trend, in May, sales fell by 7.8%.