US Federal Reserve chairman Jay Powell has said he foresees a “sustained expansion” of the country’s economy, in a testimony to Congress a day after President Trump ripped into the central bank.
However, Powell said if a downturn should occur then the government would need to fight it with fiscal policy. Yet he said this could be a problem because federal debt is “on an unsustainable path”.
Powell also reiterated that the Fed is unlikely to cut rates again unless there is a “material reassessment of our outlook”.
The Fed chair’s statement to the Joint Economic Committee of the US Congress before a testimony later today came on the heels of a major speech on the economy by Trump yesterday. The President lauded his own economic achievements and defended his trade war with China.
Trump repeatedly attacked the Fed, however, saying its relatively high interest rates – compared to the Eurozone, UK and Japan – put the US at a “competitive disadvantage”.
US stock markets opened lower today following Trump’s threat yesterday to ramp up tariffs if China does not cooperate. The tech-heavy Nasdaq was the biggest faller, dropping 0.3 per cent shortly after the bell. The Dow Jones and S&P 500 were down 0.2 per cent.
Yet Powell said today that “the baseline outlook remains favourable” for the economy. He was cheered by the fact that the impact of interest rate cuts were yet to be felt and said low unemployment should boost household spending.
Addressing the US economy’s slowdown to 1.9 per cent growth in the third quarter, Powell said it was “partly due to the transitory effect of the United Auto Workers strike at General Motors”.
“But it also reflects weakness in business investment, which is being restrained by sluggish growth abroad and trade developments,” he said. “These factors have also weighed on exports and manufacturing this year.”
Although he predicted a continued expansion, Powell said: “In a downturn, it would also be important for fiscal policy to support the economy.”
“However,” he said, “the federal budget is on an unsustainable path, with high and rising debt.”
“Putting the federal budget on a sustainable path would aid the long-term vigour of the US economy and help ensure that policymakers have the space to use fiscal policy to assist in stabilising the economy if it weakens,” he said.
(Image credit: Getty)