Powell Warns US Fiscal Policy Is Unsustainable, Sees "Rising Chorus" Against Tariffs

While there is far less interest in Jerome Powell's second day of his semi-annual testimony to Congress, the Fed chair did make some notable observations on the one topic which continues to fascinate markets, specifically trade disputes - and wars - saying "we don't know ultimately where this process will lead."

Powell said the central bank expects the economy to remain strong, but trade could complicate the Fed's forecasts. "... it is difficult to predict the ultimate outcome of current discussions over trade policy," he said in his prepared testimony.

When asked by Andy Barr, a Kentucky Republican, about trade and the risk of a "protracted period" of high tariffs, the Fed Chair said that "there was a lot of momentum in the economy earlier this year'' but he wouldn't want to see uncertainty from trade disputes result in offsetting that momentum, warning that if Trump's trade policy "results in broader, higher tariffs across a broad range of traded goods or services that remain that way for a longer period of time, that will be bad for our economy and for other economies too."

Senators representing largely agricultural and industrial states tended to express the most concern. Powell largely deflected the questions, saying the Fed doesn't determine trade policy.

"I'm going to try to walk the line ... and not comment on any particular policy. But, in principle, open trading is good," Powell said.

Powell emphasized the uncertain nature of the Trump administration's current trade policy.

"We don't know how this goes. This process we're in right now, the administration says it's going for broadly lower tariffs. If that happens, that's good for the economy. On the other hand, if we wind up with higher tariffs, then not so good."

In a surprising twist, Sen. Heidi Heitkamp, cited a speech from former Fed Chair Ben Bernanke in an attempt to get Powell to be more specific.

"Would you agree with Bernanke when he said in a 2007 speech on trade that restricting trade by imposing tariffs, quotas or other barriers, is exactly the wrong thing to do for the economy?" Heitkamp asked.

Powell's response was simple: "Assuming you're talking about them remaining in place over a sustained period of time, asolutely."

Powell also made his most direct warning about the risk to the economy as a result of escalating trade wars:

"we hear from our extensive network of business contacts a rising chorus of concern. As you pointed out, lots and lots of individual companies have been harmed by this. We don't see this in the aggregate numbers yet because it's a $20 trillion economy, and these things take time to show up, but we hear many, many stories of companies that are concerned and are now beginning to make investment decisions, or not make them, because of this."

Then there is the risk of retaliation, with Powll saying that "you are just beginning to see the retaliatory tariffs come into place'' so it's just beginning."

And then a warning: "you want to be careful to walk on this path because it might not be so easy to get off it.''

* * *

Powell also touched on several other topics, such as the yield curve, the balance sheet shrinkage, on the fiscal picture, and on stagnant wages.

When asked about the yield curve, Powell said that short-end rates reflect Fed expectations. The long-end reflects market estimate of the neutral rate - you have to "pull that out" and that tells you the stance of monetary policy. According to some, this confirms the idea that a flat yield curve would tell Powell we are at neutral.

Powell also said that there is currently no plan to change the pace of balance sheet roll-off.

When asked about the lack of real wage growth, he said "we look at a wide range of wage and compensation indicators'' and "pretty consistently across the board, they've all moved up.''

He had two other notable comments: first that "while many financial assets prices are elevated above normal", he gave traders the green light to buy saying that "no issues are flashing red in financial markets", which is clearly a different take than that of Morgan Stanley which sees quite a few flashing red issues in the late cycle economy.

But his best comment was the following: "U.S. fiscal policy has been on an unsustainable path for some time. It continues to be unsustainable", something Goldman showed back in February.

Well, as long as everyone at least admits the US is headed for a dead end, that probably makes it better and is a good enough reason to Buy The Fucking Dip.

Comments

Looney Killtruck Wed, 07/18/2018 - 11:29 Permalink

 

it is difficult to predict the ultimate outcome of current discussions over trade policy

Fed-speak Translation: We were clueless before, but now we are even moar clueless.   ;-)

Looney

Edit: In Ancient Greece, all oracles were beautiful young women. If their predictions never came true, people, at least, enjoyed watching them nekkid chicks. With the Fed, we are stuck with a bunch of ugly senile shamans. ;-)

In reply to by Killtruck

bluecollartrader Free This Wed, 07/18/2018 - 13:06 Permalink

Powell's right, of course. But everyone knows the elephant in the room is that if gubmint spending is cut, the economy tanks. Everyone who pays attention knows this. The non-gubmint domestic economy cannot sustain the levels of GDP currently 'enjoyed.' We are on the same track as Japan was a few decades ago.

In reply to by Free This

earleflorida GoFuqYourself Wed, 07/18/2018 - 11:41 Permalink

seriously[?]…--- when/why/ [and] how did tariffs and NATO become an international issue in such a short span of tyme?

or was it all premeditated long ago to get a hard Brexit which was a gimme from the get go!

Note:  All of Canada is a gigantic British colony since mid 18th century after the brits ran the frogs out in the 7 year war. Think about it and now the USSA will go after Mexico bigtime once Brexit is a done deal in early April/2019

In reply to by GoFuqYourself

Offthebeach Killtruck Wed, 07/18/2018 - 14:26 Permalink

"Powell largely deflected the questions, saying the Fed doesn't determine trade policy."

 

Except trade in bonds, stocks, banks, insurance and re insurance, housing, real estate, icommodity markets, nterest rates, income tax, labor rates, foreign exchange and foreign banks and forign central banks.  Other than that we are on the sidelines.  Strict charter rules, principals ...stuff like that.

In reply to by Killtruck

auricle lester1 Wed, 07/18/2018 - 12:00 Permalink

Banning cryptocurrency is to ban decentralized computing. It is a sharing economy and in order to transact on a given distributed ledger(blockchain) you need it's currency to do so. Banning cryptocurrency in the US is tantamount to telling the rest of the world to develop the future without us. I don't see it happening. Regulating and taxing are what congress are discussing.

In reply to by lester1

Yen Cross Wed, 07/18/2018 - 11:31 Permalink

  Over 1/2 the states are bankrupt and there's homeless encampments everywhere, but the eCONomy is strong.

  What I find even more fascinating is the fact that all the fake news is using the trade wars as fodder and excuses for what the real underlying problems are with the economy.

   Just like the bullshit fake Russia narrative is used to deflect attention away from the corrupt assholes in D.C.

EddieLomax Callz d Ballz Wed, 07/18/2018 - 12:47 Permalink

The same people don't want to lose money.

Since the dollar went off the gold standard the debt has been doubling every 8 years on average (there was a bit of lag before it started, but the trend has been rock solid since then).

That means that Trump will have to push the national debt to 40 trillion dollars when he leaves office to keep the trend going, looks like that trend will end on Trumps watch, I doubt that will be a bad thing.

In reply to by Callz d Ballz

MrNoItAll Yen Cross Wed, 07/18/2018 - 12:49 Permalink

The narratives are all being put in place to provide cover for the elites and their minions to escape blame for the inevitable global economic crash and reset, along with all the devastation that will result. This has been going on for some time now. Trump is the lynch pin of that multi-pronged narrative. The story for the history books will be (or is intended to be): a) The economy was strong, b) GDP was growing, c) oil production was off the charts and growing, d) America was one step away from energy independence, e) then TRUMP fucked it all up with his trade wars, one thing lead to another and it all broke down -- don't blame us!

In reply to by Yen Cross

Vendetta Wed, 07/18/2018 - 11:32 Permalink

We had trade BEFORE the ‘free trade’ meme dominated the yack in DC about protectionism ‘bad’, ‘free trade’ good nonsense ... and we will have trade AFTER the globalist meme has a stake driven into its heart.

DingleBarryObummer gatorengineer Wed, 07/18/2018 - 11:44 Permalink

Stawks seem to be taking the 25% on 34 billion just fine, so I don't understand waiting till September for the addition 10% on 200 billion.  He's already halfway through his first term so I don't know why this is taking so long.

Maybe a super genius that understands 3d Chess can explain it to a scustamade gavonne like me.  Or is Mnuchin just such a genius?  Robo-foreclosing on grannies' retirement homes and then lying about it to congress takes a very High IQ, I'm sure.

In reply to by gatorengineer

CashMcCall gatorengineer Wed, 07/18/2018 - 13:29 Permalink

That is simply a false statement. China has not devalued the Yuan. Trump's Tariffs and the rising dollar automatically devalue ALL currencies. And if you knew anything about Currencies, you would know that no less than Ten emerging market currencies are at multi-year lows. Thank Trump. The Chinese don't need to devalue their currency, Trump is doing it for them and in doing, cutting off US exports and stimulating foreign imports. 

BTW, The USA trades with 102 nations and the US has a trade deficit with all of them. This is planned you dork with the high dollar policy and the US Dollar Reserve Currency. The intent is to make foreign products cheap so the US can export its inflated dollars in exchange for highly discounted foreign products. 

 

Also Kabuki is Japanese, not Chinese. 

In reply to by gatorengineer

BetterRalph Vendetta Wed, 07/18/2018 - 12:42 Permalink

The words FAIR TRADE got 86'd.  I saw them spoken once out of Trump's mouth, then suddenly fake news and everyone started saying said FREE TRADE.  Well,  FREE ain't the same as FAIR, they didn't explain any difference. About this time they changed the narrative to TRADE WAR. It's almost like the media doesn't want FAIR TRADE.

In reply to by Vendetta