As central bankers meet in Jackson Hole, the Fed ponders its next move
IT IS NOT easy being a central banker these days. Jerome Powell, the chairman of the Federal Reserve, has come under particular scrutiny in recent months. Some commentators believe he has been too hawkish, even though he cut the Fed’s main interest rate by 25 basis points last month, and should cut rates more aggressively. President Donald Trump, who appointed Mr Powell, is now his most vocal critic, and recently tweeted that the Fed should cut its benchmark rate by “at least 100 basis points”.
Lowering interest rates would be a natural response to an economic downturn, but optimists have taken comfort from labour-market figures, which suggest that America’s economy is still humming along. The country’s unemployment rate currently sits at just 3.7%, its lowest level in five decades. The labour-force participation rate of “prime-age” workers aged between 25 and 54, although still below where it was before the financial crisis, has been rising steadily since 2015.
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Still, investors are anxious. America’s trade war with China shows no signs of abating. The country’s manufacturing sector is growing at its slowest pace in nearly three years; and business investment contracted in the second quarter. Meanwhile Germany, Europe’s economic powerhouse, appears to be tipping into recession. Recent news from America’s Bureau of Labour Statistics has not helped matters. On August 21st the agency revised its figures, saying that employers added half a million fewer jobs in the year ending March 2019 than previously reported (see chart). The 0.3% downward revision to total non-farm employment was the biggest in a decade.
The bond market is also sending worrying signals. The yield on America’s short-term government bonds currently exceeds that of its longer-term debt. Such “inversions” have preceded each of the past seven recessions. A forecast from the Federal Reserve Bank of New York issued on August 2nd, based on historical data from the government-bond market, estimated that there was a 31% chance of a recession within the next twelve months. Up-to-date data would yield an even scarier forecast. Mr Trump was at one point so concerned that he floated the idea of issuing a new wave of tax cuts, though he appears to have since reconsidered.
All eyes are now on Mr Powell, who is due to speak tomorrow at an annual gathering of central bankers in Jackson Hole, Wyoming. Financial markets currently suggest the Fed has a 98% chance of cutting its benchmark rate by at least 25 basis points by September. Whether such a cut will be enough for Mr Powell to stave off a recession and placate his critics remains to be seen.