With Fed's 'insurance' cut, Powell takes cue from Greenspan
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[August 01, 2019] By
Ann Saphir and Jason Lange
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.
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
officials, 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.
And though U.S. President Donald Trump complained the Fed had "let us
down" by delivering only a limited does of stimulus, the economic record
shows that both times the Greenspan Fed tried insurance cuts, they
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 - https://tmsnrt.rs/2ytqEsG)
[to top of second column]
Alan Greenspan is pictured after the memorial service of U.S.
Senator John McCain (R-AZ) at National Cathedral in Washington,
U.S., September 1, 2018. REUTERS/Joshua Roberts/File Photo
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 Long Term
Capital Management hedge fund boded ill for the future. Again, the Fed cut rats
three times, the stock and credit markets recovered, and the expansion
(Graphic: Market turnaround - https://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? - https://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
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)
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