The escalation of the trade war may be too much for the Fed

Illustration: Lazaro Gamio/Axios

In his speech at Jackson Hole on Friday Fed Chair Jerome Powell effectively acknowledged that the world has reached the end of monetary policy as we know it.

What's happening: While central banks could rest assured they had the tools to rein in inflation and unemployment in the old days, that's now uncertain in this new world.

Why it matters: Central bank policy was the biggest factor in pulling the global economy out of the financial crisis in 2009 and has been the primary force driving markets for the past decade.

  • Central banks are cutting interest rates at a pace not seen since the crisis in an attempt to stave off the global economic slowdown that's been picking up speed this year, but it may be futile.
  • The escalation of the trade war is exacerbating already troubled and highly indebted economies in Europe, Japan, China and elsewhere.

The big picture: Powell's speech was a daunting admission that the all-powerful Federal Reserve may be powerless to stop a recession if it reaches the U.S. — at least with its current box of tools.

  • There are “no recent precedents to guide any policy response to the current situation," Powell said Friday, referencing the trade war.

Between the lines: Worry about the waning impact of monetary policy was also recently voiced by former Treasury Secretary and National Economic Council head Larry Summers.

  • Summers notes in a piece with co-author Anna Stansbury that there are "strong reasons to believe that the capacity of lower interest rates to stimulate the economy has been attenuated — or even gone into reverse."
  • Worse, they argue that in recent years additional government spending also has proven less effective at boosting the economy.

The last word: "As we look back over the decade since the end of the financial crisis, we can again see fundamental economic changes that call for a reassessment of our policy framework," Powell said at Jackson Hole.

  • "To address this new normal, we are conducting a public review of our monetary policy strategy, tools, and communications — the first of its kind for the Federal Reserve ... and we are asking whether we should expand our toolkit," Powell said.

What's next

Federal Reserve announces 2nd consecutive rate cut

Fed chairman Jerome Powell. Photo: Mark Wilson via Getty Images

The Federal Reserve cut interest rates by a quarter point on Wednesday, bringing the target range for the benchmark Fed Funds rate to 1.75%–2%.

Why it matters: The Fed's 2nd consecutive rate cut reflects worries about the U.S. economy. The trade war and slowing growth around the world have made corporate executives more worried than they've been in years.

Go deeperArrowSep 18, 2019 - Business

Fed chair upbeat on U.S. economy, but still hints at rate cut

Fed chairman Jerome Powell at a news conference in July. Photo: Andrew Caballero-Reynolds via AFP

Speaking on a panel in Zurich on Friday, Federal Reserve chairman Jerome Powell remained optimistic about the state of the U.S. economy — including the labor market, despite the morning's softer-than-expected jobs numbers. Still, he hinted that another interest rate cut could be coming later this month.

Why it matters: Powell said the Fed is not "forecasting or expecting a recession," but noted there are significant risks, including slowing global growth and uncertainty around trade policy which is "causing companies to hold back on business investment decisions." Powell also said that lowering "the expected path of interest rates" has also supported the U.S. economic outlook.

The divided Fed is losing investors' faith

Illustration: Aïda Amer/Axios

The Fed is doing its best to prop up the U.S. economy in the face of possible economic turbulence, but it's beginning to look like a rudderless ship and it's fast losing the confidence of investors.

Driving the news: The Fed's rate-setting committee cut U.S. interest rates 25 basis points as expected on Wednesday, but did so with 3 dissenting votes for the first time since 2016.

Go deeperArrowSep 19, 2019 - Business