Powell Says Fed Has Room to Cut, May Have Kept Policy Too Tight

(Bloomberg) -- Federal Reserve Chairman Jerome Powell suggested that the central bank has room to ease monetary policy as the tie between the inflation and jobless rates has broken down.

“The relationship between unemployment and inflation became weak” about 20 years ago, Powell told the Senate Banking Committee Thursday. “It's become weaker and weaker and weaker.”

The Fed chief, under pressure from President Donald Trump to lower borrowing costs, has made a strong case to reduce rates at the central bank's meeting later this month to offset weakness stemming from a global slump in manufacturing and business confidence linked to trade tensions.

The Fed chief stressed at his second day of congressional testimony that the U.S. economy is “in a very good place.” He said the central bank wants “to use our tools to keep it there.”

“He sent a pretty straightforward signal that they intend to lower interest rates,” said Ward McCarthy, chief financial economist at Jefferies LLC.

Neutral Rate

Powell told Senators that the so-called “neutral rate,” or policy rate that keeps the economy on an even keel, is lower than past estimates have put it -- meaning monetary policy has been too restrictive.

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“We're learning that interest rates -- that the neutral interest rate -- is lower than we had thought and I think we're learning that the natural rate of unemployment is lower than we thought,” he said. “So monetary policy hasn't been as accommodative as we had thought.”

Fed officials in fact marked down their estimate of the longer-run policy rate to 2.5% in June, from 2.8% in March.

Investors fully expect a quarter-point cut at the Fed's July 30-31 gathering, according to pricing in interest-rate futures, though odds were dialed back a bit after a stronger-than-expected U.S. inflation report earlier on Thursday.

New York Fed President John Williams, speaking later on Thursday, said that the argument to ease had strengthened and the central bank wants to “extend this expansion, and have monetary policy in the right place to do that.”

Read more: Two Fed Regional Chiefs Say July Rate Cut May Not Be Warranted

He was among several policy makers speaking during the day including Atlanta Fed chief Raphael Bostic and Richmond's Thomas Barkin, who both struck a more cautious tone.

“I am not seeing the storm clouds generating a storm yet,” Bostic told reporters in Atlanta, adding that it would be “fair” to characterize him as skeptical about the need for a rate cut. “From an employment perspective, the economy continues to perform in a very positive way,” he said.

At the congressional hearing in Washington, Powell received bipartisan support for his independence at a time when the Trump administration is openly attacking Fed policies. Powell deflected a question about whether this complicated policy making.

Read more: Republican Senators Support Fed's Powell Despite Trump Attacks

Trump discussed firing Powell in late 2018 and asked White House lawyers earlier this year to explore options for removing him as Fed chairman, Bloomberg has reported. When answering a similar question Wednesday during his testimony before the House Financial Services Committee, Powell said he wouldn't leave even if Trump tries to fire him.

--With assistance from Christopher Condon, Katia Dmitrieva and Ryan Haar.

To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net;Reade Pickert in Washington at epickert@bloomberg.net

To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Jeff Kearns

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