The UK’s vote to exit the EU has boosted global risks and may have knock-on effects for the US economy and monetary policy, a senior Federal Reserve policymaker has warned.
Jerome Powell, a member of the Fed’s Board of Governors, said it was too soon to jump to conclusions about Thursday’s shock vote, but that the events in the UK had the potential to create new headwinds to growth around the world, including in the US.
The comments were the first by a Fed governor since the UK’s referendum, which has triggered heavy losses in stock markets as well as sharp gyrations in currency markets. They will reinforce expectations that the central bank will tread very carefully in the coming months before considering another rate rise following its December increase.
The Fed held rates unchanged in June in part because of the looming UK vote, which came a week after the US central bank’s latest policy meeting. After the UK results emerged the Fed announced it was ready to provide dollar liquidity to markets via existing swap lines if needed, adding that it was carefully monitoring global developments and co-operating with other central banks.
Mr Powell said that there had already been risks to the US from overseas factors such as stubbornly low growth and inflation in key trading partners, and the hazards had only grown since the events in Britain.
“These global risks have now shifted even further to the downside, with last week’s referendum on the United Kingdom’s status in the European Union,” said Mr Powell in a speech in Chicago on Tuesday evening. “The Brexit vote has the potential to create new headwinds for economies around the world, including our own. The risks to the global outlook were somewhat elevated even prior to the referendum, and the vote has introduced new uncertainties.”
Mr Powell said conditions in financial markets had tightened since the vote, but that markets were still functioning in an “orderly manner”, adding that the US financial sector remained resilient.
While he was not rushing to judge what Brexit would mean for the outlook, Mr Powell suggested there could well be ramifications for the Fed to consider. “As the global outlook evolves, it will be important to assess the implications for the US economy, and for the stance of policy appropriate to foster continued progress toward our objectives of maximum employment and price stability.”
As things stand, the US economy has made “substantial” progress towards maximum employment, while there was still room for improvement and the central bank has work to do to ensure inflation returns to its 2 per cent goal. However, Mr Powell singled out soft employment reports in recent months as a reason for concern.
“While I would not want to make too much of two monthly observations, the strength of the labour market has been a key feature of the recovery, allowing us to look through quarterly fluctuations in GDP growth. So the possible loss of momentum in job growth is worrisome,” he said.
While he expected the US economy to continue making progress, “monetary policy will need to remain supportive of growth, as we work through the challenging global environment.”
Mr Powell also gave a cautious view of the longer-term outlook for the US, suggesting that America’s potential growth had slowed. He cited forecasters’ suggestions that longer-run growth had fallen by a percentage point to about 2 per cent, something that implies “dramatically smaller increases in living standards over time”.
A key factor behind this was slower growth in productivity, which was being held back by weak investment and poor growth in total factor productivity, which measures companies’ ability to produce more efficiently. One contributor to low productivity growth could be decreased dynamism in the US economy, for example in the realm of business formation and in workers’ willingness to move to new places and take on new jobs.
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