Business·Analysis

Low-key U.S. Fed chair charms skittish markets with more patience: Don Pittis

Like a whisperer of wild animals, a tired-looking U.S. central banker seems to have developed a knack for soothing skittish markets.

Jerome Powell's words soothed, even if the Fed's outlook hasn't really changed much

U.S. Federal Reserve chairman Jerome Powell listens at yesterday's news conference, where he was careful not to make waves, charming the markets for now. (Leah Millis/Reuters)

After a year in the job, Federal Reserve chair Jerome Powell has learned the central banker's essential skill: how to be boring.

The last time Powell held a monetary policy news conference, markets climbed gently after the Fed's printed policy release, a widely expected quarter-point increase in interest rate.

But they turned tail and began to drop after the world's most powerful central banker began his forthright explanation of the bank's thinking.

This time, on Wednesday, Powell held rates steady. Once again, that was entirely expected and should not have affected markets. But like an animal whisperer with a knack for approaching skittish beasts, this time the Fed chair avoided emphasizing interest rate hikes and quelling an overheated economy.

Instead, his tone was one of patience and flexibility, a soothing note clearly composed by Powell and his team for a speech earlier this month and tuned to tranquillize market fears.

"We are now facing a somewhat contradictory picture of a generally strong U.S. macroeconomic performance alongside growing evidence of cross-currents," said Powell in a phrase that could have come from the mouth of his predecessor Janet Yellen after years in the job.

"At such times, common-sense risk management suggests patiently awaiting greater clarity, an approach that has served policy-makers well in the past," he said to the assembled financial reporters.
This time, markets responded positively to Powell's remarks although the change was as much in tone as in substance. (Leah Millis/Reuters)

If you listened carefully the message was virtually identical to his presentation in December that so spooked markets.

A strong economy in 2019, though not as strong as last year. A strong job market and inflation near two per cent. All pointing to interest rate increases later this year. And all that completely dependent on reading the economic data as the year unfolds.

But what a difference tone makes.

One significant change in that tone was Powell's stance on inflation. Although the expected number of rate increases is unchanged, Powell said that rather that changing those rates to prevent anticipated inflation, he would wait for inflation to lead the way.

Waiting for inflation

"I would want to see a need for further rate increase and for me a big part of that would be inflation," he said. "It wouldn't be the only thing, but it would be important."

Powell has described himself as a plain-speaking man, and one reporter used that description to try to draw him out. But compared to previous news conferences, his answers appeared bland and evasive, seeming to peter out at the end.

Asked when the period of patience would end, he told the reporter we would know when it was over. When asked what had really changed since December, he noted slowing global growth.

"Let's just say it continues," said Powell.

One thing that had changed since the last time he met reporters was the partial shutdown in government services as U.S. President Donald Trump battled Congress over spending on the president's border wall.
Powell said the partial government shutdown should not have a big effect on the economy so long as it does not resume after the current truce and stretch on for a long time. (Carlos Barria/Reuters)

But on that point Powell was reassuring. So long as the shutdown does not resume after the three-week negotiated truce any effect on the economy will be small and temporary as government workers get their back pay and spend it.

The other issue that got a lot of attention at this news conference was the Fed's plan for the trillions of dollars in bonds accumulated to stimulate the economy during quantitative easing.

When interest rates got as low as they could go, the Fed began buying up bonds from private institutions, adding them to the central bank's balance sheet, effectively releasing the value of those bonds into the economy as cash.

Piles of bonds 

Some critics have blamed a long-term plan to reduce that pile of bonds — simply by not buying more once exiting bonds expire, effectively withdrawing the previous stimulus — for driving markets down. That view is disputed.

Nonetheless, Powell employed a bland, conciliatory tone, emphasizing that should the economy need further stimulus the bank would not hesitate to use all the tools at its disposal, including buying more bonds. 

But once again tone was everything, because essentially, for the short term, nothing at all has changed. Powell merely explained why they had put the balance sheet pay-down on autopilot: because adjusting the balance sheet and interest rates simultaneously would confuse everyone.

"Then we could put the balance sheet on the side and have interest rates as the active tool of policy," said Powell. "I think that the market is now looking for more clarity around that, and I think that we'll be providing it."

Follow Don on Twitter @don_pittis

  

About the Author

Don Pittis

Business columnist

Don Pittis was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London. He is currently senior producer at CBC's business unit.

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