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Rebuffing Trump, Fed chairman says he will 'avoid' negative interest rates

"We're determined to avoid it here in the United States," Fed Chairman Jerome Powell said when asked about lower interest rates.
Image: Jerome Powell holds a news conference in Washington
Federal Reserve Chairman Jerome Powell at a news conference following the two-day meeting of the Federal Open Market Committee on interest rate policy in Washington on Wednesday, Jan. 29, 2020.Yuri Gripas / Reuters

In his news conference following the Federal Reserve's January meeting, which wrapped up Wednesday, Chairman Jerome Powell said the Chinese coronavirus is a situation that bears watching, even as he stressed that the Fed's mandate would remain focused on U.S. economic growth.

Powell also once again emphasized the many ways trade uncertainty has trickled into decisions made by executives and policymakers, even as he sounded a reassuring town about the overall economic outlook.

"Uncertainties about the outlook remain, including those posed by the new coronavirus," Powell said in his prepared remarks, a theme he expanded on during the question-and-answer period.

"It's a very significant issue," he said of the virus, which to date has sickened more than 7,700 people and killed 170. Powell acknowledged the potential for worldwide disruption and uncertainty about macroeconomic effects in China, saying, "We are very carefully monitoring the situation."

"The issue with the coronavirus is we're not really clear on what this virus is all about," said Dan North, chief economist at Euler Hermes North America. North pointed out that the SARS epidemic of 2002 and 2003 spooked the markets but ultimately had little bearing on the trajectory of Chinese GDP growth.

"We think, as does the futures market, it's likely we'll see one more cut this year," North said.

"If the economic situation were to worsen between now and March, if hiring were to slow or wages were to decelerate… there's room for an insurance cut with rates running low if conditions warrant, but the Fed would hope not to use it," said Chris Battifarano, chief investment officer of FineMark National Bank & Trust.

The trio of rate cuts the Fed undertook last year might have been enough to ward off an economic slump in the short term, but Powell as well as other market observers noted that these interventions leave policymakers with fewer tools to fight a recession.

In spite of numerous criticisms from President Donald Trump, the Federal Reserve has stayed away from the negative interest rates that have characterized many other central bank approaches to monetary policy, and Powell indicated this wouldn't change anytime soon, explaining that low interest rates could become a self-fulfilling cycle from which economies can struggle to emerge. "We're determined to avoid it here in the United States," he said.

"It's become very clear that inflation is the problem that central banks can solve," Battifarano said, but he pointed to Japan's prolonged economic slump as a cautionary tale of how negative interest rates can play out long-term. "Not only does it not work, it's damaging to banks' traditional spread-lending mode," he said.

And analysts readily point out that the U.S. has thus far managed to avoid the broader economic weaknesses present in economies like Japan and Germany. "I do think they were able to preemptively act and give the market an additional cushion," said Lindsey Piegza, chief economist at Stifel Fixed Income. "They feel they were able to navigate this soft landing," she said, noting how Powell worked to thread the needle between encouraging and cautious in his remarks on Wednesday.

"The consumer is still shouldering the entire economy," said one analyst.

"The Fed wants to look reasonable in their acknowledgement about some of the downside risks," she said.

Powell also addressed the one significant change economists picked up on in the statement the bank released, noticing that the Fed shifted from characterizing household spending as "moderate," rather than "strong."

Piegza said this was significant, given that Powell's remarks emphasized the singular role the U.S. consumer is playing in sustaining the country's economic momentum. "It's hard to see other bright spots besides the consumer," she said, noting that metrics on manufacturing, exports and business investment remain lackluster, even with low unemployment and a soaring stock market. "The consumer is still shouldering the entire economy," she said.

The Chairman said progress on trade between the U.S. and China, along with the signing of the USMCA were beneficial, but he emphasized that the businesses and markets still perceive cause for concern. "Those are potentially positive things for the economy, without question," Powell said, but he added that "a sustained reduction in uncertainty over time" would be necessary to pull business investment out of its slump — a reduction that currently is not present.

"Trade policy uncertainty remains elevated. ... It hasn't gone away," Powell said. "There's a bit of a wait-and-see attitude."

Some experts also pointed out that it still is unclear whether or not the reduction in trade tensions will benefit American workers and shoppers. "We don't know how that's going to trickle down yet to the U.S. consumer," said Brian Pirri, principal of New England Investment & Retirement Group.

"It's a positive that there was an initial deal done and a holding off on some of the tariffs, but I think it's too early to say it's going to have a meaningful impact on the U.S. and the consumer," he said.