August 1, 2019 / 5:08 AM / 3 months ago

With Fed's 'insurance' cut, Powell takes cue from Greenspan

WASHINGTON (Reuters) - In cutting U.S. interest rates but signaling that a series of further cuts was unlikely, Federal Reserve Chairman Jerome Powell on Wednesday took a page from the playbook of his predecessor Alan Greenspan, who used a similar tactic in the 1990s with apparent success.

Federal Reserve Chair Jerome Powell holds a news conference following the Federal Reserve's two-day Federal Open Market Committee Meeting in Washington, U.S., July 31, 2019. REUTERS/Sarah Silbiger

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 U.S. economy’s record-long expansion going.

“There is definitely an insurance 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 policymakers, 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. 

Last week, Greenspan endorsed the idea of an insurance rate-cut again. “If you consider that there are certain small-probability events which could be very dangerous, it pays to act to see if you can fend it off,” he told Bloomberg TV on July 24.

And though U.S. 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.

(GRAPHIC - Turning the tide: tmsnrt.rs/2ytqEsG)

Just over three years later, the economy was showing few signs of weakness, but a stock market 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.

(GRAPHIC - Market turnaround: tmsnrt.rs/2MqYneu)

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.

(GRAPHIC - Pays to take out insurance?: tmsnrt.rs/2ytnZiG)

This time around, Powell faces a different set of challenges, including an inflation rate that remains stubbornly south of the Fed’s targeted level of 2% 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 rate hikes in January, 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.

Reporting by Ann Saphir and Jason Lange; Additional reporting by Dan Burns in Washington; Editing by Cynthia Osterman and Susan Thomas

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