Macroscope | Powell’s caution signals the Fed is prepared for a U-turn in interest rate hikes

Nicholas Spiro says the Fed chairman is keeping faith with monetary tightening while the US economic outlook remains bright, but his stark warning on protectionism could pave the way for a change of course. For the trigger, watch the Treasury yield curve

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Federal Reserve chairman Jerome Powell answers questions before the House Committee on Financial Services of the US Congress on July 18. Photo: Bloomberg

Published: 4:00pm, 19 Jul 2018Updated: 11:31pm, 19 Jul 2018

Is a hawkish US Federal Reserve on a collision course with an increasingly vulnerable global economy?

This is a question which Fed chairman Jerome Powell did his best to skirt around when he appeared before Congress earlier this week to testify and answer questions about the conduct of monetary policy.

When Powell took the reins of the Fed in early February, there was a strong case for a faster pace of interest rate increases. Not only had Congress just given America’s economy a huge fiscal boost by passing a US$1.5 trillion tax cut, wage growth had accelerated to its fastest pace since 2009, suggesting that a tight labour market was finally beginning to fuel inflationary pressures.

Fast forward five months, and the case for tighter monetary policy remains compelling. A key gauge of consumer prices reached nearly 3 per cent last month, above the Fed’s 2 per cent inflation target. Data published on Monday revealed that US retail sales rose for the fifth straight month in June, providing a fillip to growth which could have been as high as 4.5 per cent last quarter.

Yet, while America is leading the global expansion, the Fed’s job has become a lot harder since tensions over global trade began to escalate in April.

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.css-1m2rp1p{color:#34b8b5;}Macroscope | Powell’s caution signals the Fed is prepared for a U-turn in interest rate hikes

Macroscope | Powell’s caution signals the Fed is prepared for a U-turn in interest rate hikes