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Takeaways From Fed Chief's Two Days on Capitol Hill

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07/12/2019 | 05:45am EDT

By Nick Timiraos

Federal Reserve Chairman Jerome Powell completed two days of testimony on Capitol Hill this week. Here are five things learned from his exchanges with lawmakers.

1. Mr. Powell is ready to cut interest rates.

After last month's Fed policy meeting, he signaled a July rate cut was likely if the economic outlook didn't improve in the coming weeks, and on Wednesday he largely played down positive news while highlighting worries about risks from global growth and trade uncertainty.

Mr. Powell also repeatedly cited soft inflation numbers. Dormant price pressures lower the risks of providing more stimulus.

2. Congress supports Mr. Powell.

The Fed leader regularly treks up to Capitol Hill. His public calendar shows he's had meetings individually or in small groups with 116 lawmakers since becoming central bank chair (this figure includes some who have met twice with Mr. Powell).

That outreach appears to be paying off. Democrats were warm to Mr. Powell, encouraging him to stand firm against President Trump's sustained criticism. And Republicans didn't join Mr. Trump in pressing any critique. Sen. Pat Toomey (R., Pa.) commended the Fed leader on Thursday for comments he made the day before in which he said he wouldn't leave office if Mr. Trump tried to force him out.

Of course, a favorable economic environment helps. The real test for Mr. Powell's reservoir of congressional goodwill could come if a downturn arrives.

3. Fed officials are very worried about getting stuck with near-zero rates.

Fifteen years ago, Japan fell into a sticky trap: easing inflation, interest rates near zero, and limited ability to generate stronger growth and counteract recessions.

"There are a lot of lessons to be learned from the experience of Japan over the last quarter century, and all of us have looked very carefully at that," Mr. Powell said Wednesday, explaining why it was important to keep inflation at the Fed's 2% target.

He didn't address two main critiques of a rate cut right now -- that the Fed would be using valuable policy ammunition for a downturn that isn't obvious or that rate cuts could fuel asset bubbles.

Of course, there's rarely a risk-free choice in central banking. When it comes to avoiding the problems faced in Japan, Mr. Powell's approach suggests he sees the risks of doing too little as potentially more costly than doing too much right now.

4. Mr. Powell sees more room for the labor market to improve.

For years, Fed officials believed they needed to raise interest rates to prevent excessive inflation because a low and falling unemployment rate suggested fewer spare resources, or slack, across the economy.

But on Wednesday, Mr. Powell pushed back against a characterization that the labor market is hot, or so tight it could fuel too much inflation. "To call something hot, you need to see some heat," he said. "While we hear lots of reports of companies having a hard time finding qualified labor, nonetheless we don't see wages really responding."

5. Support for tighter money has evaporated.

For most of this decade, many Republicans were especially critical of the Fed's policies to stimulate growth by cutting short-term interest rates to near zero and engaging in bond-buying programs to lower long-term rates after that.

Fast forward to the present, and the Fed's turn toward easing policy by potentially cutting rates and ending the shrinkage of its $3.8 trillion asset portfolio this September received little pushback this week from lawmakers. Mr. Trump has loudly opposed many of the efforts to tighten policy that several Republicans until recently had vocally supported.

Write to Nick Timiraos at nick.timiraos@wsj.com

This article is part of a news chaine.
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