With Fed’s ‘insurance’ cut, Powell takes cue from Greenspan

Alan Greenspan is pictured after the memorial service of US Senator John McCain at National Cathedral in Washington, US, September 1, 2018. — Reuters pic
Alan Greenspan is pictured after the memorial service of US Senator John McCain at National Cathedral in Washington, US, September 1, 2018. — Reuters pic

WASHINGTON, Aug 1 — In cutting US interest rates but signalling that a series of further cuts was unlikely, Federal Reserve Chairman Jerome Powell yesterday took a page from the playbook of his predecessor Alan Greenspan, who used a similar tactic in the 1990s with apparent success.

Rather than marking the start to a lengthy rate-cutting cycle, Powell said at a news conference after the decision that the Fed’s quarter-point rate reduction was an “adjustment” aimed at keeping the US economy’s record-long expansion going.

“There is definitely an aspect to it,” said Powell, echoing the phrasing that the Greenspan Fed used to describe its monetary policy easing in 1995 and again in 1998.

The reference may not have been coincidental. Since becoming Fed chair in February 2018, Powell has met at least a dozen times with former Fed officials, according to records on Powell’s daily activities released by the Fed, but no one more frequently than Greenspan. The two last met on April 17, sharing a 75-minute lunch.



And though US President Donald Trump complained the Fed had “let us down” by delivering only a limited dose of stimulus, the economic record shows that both times the Greenspan Fed tried insurance cuts, they worked.

In July 1995, industrial production and job creation were slowing and new unemployment claims were rising. Though Fed policymakers at the time did not believe the data meant a recession was coming, they did not want to wait to find out. They cut rates three times, and the manufacturing sector and the job market both regained health.

Just over three years later, the economy was showing few signs of weakness, but a swoon and credit crunch following the collapse of hedge fund Long Term Capital Management boded ill for the future. Again, the Fed cut rates three times, the stock and credit markets recovered, and the expansion continued.

By the end of the decade, with the help of the two sets of “insurance” cuts, the economy had chalked up what was then a record-long expansion, surpassed in length only by the current one.

This time around, Powell faces a different set of challenges, including an rate that remains stubbornly south of the Fed’s targeted level of two per cent and sudden swings in trade policy that are denting business confidence and investment.

Powell contends that all of the Fed’s actions this year, starting with calling an end to in , have helped keep the economy on a relatively even keel. It may be months or more before it becomes clear whether the added stimulus of slightly lower rates keeps the economy chugging along. — Reuters

Source: The Malay Mail Online







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