Federal Reserve Chairman Jerome Powell addressed economic uncertainties during a speech in Philadelphia, emphasizing the central bank’s strategies to maintain market stability. In his speech before the National Association of Business Economics, Powell put this all in context. He had defended the Fed’s previous 2020/2021 actions of purchasing longer-term Treasury bonds and mortgage-backed securities. He was blunt in describing what would happen if these steps were taken, especially considering the economic situation we find ourselves in.
In his speech, Powell hinted at a possible end to the Federal Reserve’s practice of balance sheet shrinking. Currently, that balance sheet sits at about $6.6 trillion. This has left the central bank with persistent challenges in the labor market. This is a concern that Powell repeatedly warned about, starting at the Fed’s September meeting. He told Reuters that the Fed is “very focused” on what’s happening in employment today.
“The outlook for employment and inflation does not appear to have changed much since our September meeting.” – Jerome Powell
In his remarks, Powell underscored the importance of the shutdown’s recent disruptions by the federal government. This five-week shutdown has seriously restricted access to vital economic data. However, against this backdrop of challenges and uncertainties, he made the decision to cut the key interest rate for the first time this year. This decision gives hope that the Fed will be cautious in cutting rate or responding to economic changes.
Powell pointed to why we went there. Those previous asset purchases. He claimed that these moves were necessary to avoid what could have been a major collapse in the Treasury securities market. An event of this magnitude would have resulted in much higher interest rates, making economic recovery efforts all that more difficult.
“With the clarity of hindsight, we could have—and perhaps should have—stopped asset purchases sooner.” – Jerome Powell
As Powell outlined the Fed’s current focus, he recognized a turning of the tide in worries about risks to employment. He explained that these increasing downside risks have trying to arouse a rethinking of both what the Fed should consider to be overall economic risks.
“Rising downside risks to employment have shifted our assessment of the balance of risks.” – Jerome Powell
