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US Fed on quest for unicorn of monetary policy: the soft landing

AFP  |  Washington 

The US is on a quest for a mythical goal: keeping steady without allowing to catch fire.

This so-called soft-landing is the unicorn of central banking, rarely if ever seen.

The Federal Reserve's job might seem simple: the is closing in on the longest period of growth in recorded history, with unemployment at the lowest in nearly 50 years and right on target at two percent. By those measures the can declare victory.

Full employment and stable are the goals that set for the But the wild ride on US stock markets in recent weeks, and in particular the past four days, show the challenge for central bankers in an environment where can change economic policy and shake business confidence with each tweet.

Economic data have started to early warning signs and anxiety among businesses is amplified by Trump's use of uncertainty as a negotiating tool while he pursues a confrontational trade policy, targeted at allies and adversaries alike -- but in particular against

The Fed's role is a balance between cheerleader, And lately senior officials, including Jerome Powell, have had to change their messaging to calm jittery investors: signalling it might slow the pace of increases in the key lending rate.

The US stock market took another dive on Friday, with losses of more than two percent, or close to 600 points for the Dow.

The critical employment report on Friday gave a mixed message about the state of the Job gains slowed to 155,000 last month, lower than expected and well below the 209,000 monthly average of the last 12 months.

That slowdown, possibly reflecting the lingering effects of the hurricanes in the prior two months, is in keeping with an hitting its peak.

"Signs of a maturing, but still robust labor market," of said of the report, echoing the view of other analysts.

But the data also showed wages continued to rise and were 3.1 per cent higher than a year earlier, outpacing inflation.

And the Business Roundtable's quarterly survey released Friday showed that while chief executives remained confident about the economy, they cited labour as the primary cost pressure their companies face.

That same sentiment has been reflected in the surveys of the and services sectors, as well as the Fed's "beige book" national survey, showing widespread labor shortages and increasing reports of wage and price increases in many industries as a result.

Rising wages always make the sit up and take notice since this feeds into inflation. Tight labour markets have even caused some companies to delay projects but the primary risk businesses see -- including 82 per cent of those in the Business Roundtable survey -- is tariffs.

Trump has imposed steep tariffs on imported and aluminum, and on USD 250 billion in goods from China, raising costs, notably in the auto sector, which has seen major job cut announcements, and delaying expansion and investment plans.

The key challenge for the Fed effort to achieve a soft landing will be to address the contrary forces of rising price pressures and a slowing economy.

Although Trump announced a 90-day tariff truce with China's Xi Jinping, doubts about the timeline and likely policy outcomes have increased fears that the US economy could slow and even contract in the next two years, sending investors scurrying for cover this week.

Powell has presided over three rate increases this year, and a fourth is widely expected in December and the Fed has for months has repeatedly said it intends to continual gradual increases.

But from one speech to the next in recent weeks, Powell changed his tune amid the pessimistic market reaction, changing gears from highlighting the strength of the economy and the plan for continued rate increases, to stressing that the finish line is close.

And the most direct sign of the central bank's intentions came Thursday when reported the Fed was "considering whether to signal a new wait-and-see approach" since "they are becoming less sure how fast they will need to act or how far they will need to go, and they want to assess how the economy is holding up under moves they have already made."

Fed said Friday the gradual rate increase strategy had worked well and remained "appropriate in the near term."

But she stressed that as the focus on sustaining the expansion as the outlook evolves "we'll make adjustments to the path of policy.

(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)

First Published: Sat, December 08 2018. 03:10 IST