Federal Reserve Chairman Jerome Powell is likely to signal again this week that monetary policy is on hold, buttressing the belief that he may steer clear of action through 2020.
Surprisingly, that would be an historic anomaly for a US presidential election year. Rather than keeping its head down, the Fed has changed policy in one direction or another in each of the last 10 presidential polling years — though in 2016 it didn’t act to raise interest rates until after the November election.
In 2012 the Fed didn’t move its benchmark rate, which was already at zero, but did announce its third round of large-scale asset purchases in September.
“If you look back in history and see what the Fed did in election years, the Fed did everything they had to do,’’ said Roberto Perli, a partner at Cornerstone Macro in Washington. The best way for them to preserve their independence and credibility “is to do what they think is right.’’
That hasn’t always shielded them from criticism. President George HW Bush famously blamed then-Fed Chairman Alan Greenspan for costing him re-election in 1992 by failing to cut interest rates more aggressively. But it’s particularly vital now for the Fed to make the case that its policies are warranted by the economic outlook because of the relentless public assault on the institution by President Donald Trump.
Breaking with more than a quarter century of precedent, Trump has repeatedly lambasted the Fed and accused it of keeping credit too tight, most recently on October 31, the day after it reduced rates for the third time this year.
Powell will have a chance to make his case twice this week, before the Joint Economic Committee of Congress and to the House Budget Committee. He’s likely to echo the message he delivered after the latest Fed rate cut: The economy and monetary policy are in good place in the 11th year of America’s longest expansion.
Investors seem to agree. Stock and bond prices have risen in recent days on signs that the US economy is weathering a slowdown abroad and on hopes of a phase-one deal in the US-China trade war.
“Things feel a lot less threatening than they did two months ago,’’ said Carl Tannenbaum, chief economist with Northern Trust Corp in Chicago. “The data for the US has suggested that we’re not on the edge of falling off a cliff.” Front and center in that regard was the October employment report, which showed payrolls rising by 128,000 despite the loss of 41,600 jobs due to the since-ended General Motors Co strike.
The solid jobs report allayed fears that companies spooked by the worldwide slowdown would chop payrolls just as they have done to capital outlays. It also bolstered the Fed’s hopes that the consumer will continue to have the staying power to keep the expansion on track in the face of cutbacks by businesses.