Fed's Powell says U.S. expansion is 'sustainable'

By Howard Schneider and Ann Saphir

DENVER (Reuters) - Federal Reserve chairman Jerome Powell on Tuesday flagged openness to further rate cuts to fend off global economic risks, repeating that the central bank will act "as appropriate" amid an economy that he said is likely to continue to expand.

"This feels very sustainable," Powell said in Denver at the annual meeting of the National Association of Business Economics.

"Clearly things are slowing a bit," he said, noting that it's normal for long expansions to have such periods. Twice in the 1990s, he said, the economy similarly downshifted, only to gain steam once the Fed cut interest rates a few times.

The Fed two interest rates this year, in July and September, were made in that spirit and have helped maintain a "favorable" outlook for jobs and inflation, Powell said. The U.S. economy "may just be gathering itself - there's no reason why the expansion can't continue," he added.

Powell noted recent data revisions showed less job growth in the year to March than previously estimated, turning a "booming" market into one of moderate growth.

Other recent economic data, including a possible contraction in manufacturing, add to the sense of reduced momentum.

"It seems that Powell is trying to, in a soft way, demonstrate to the market that the Fed continues to be aware of the downside risks and is actively willing to support the economic expansion as needed," said Jason Ware, chief investment officer at Albion Financial Group in Salt Lake City, Utah.

NOT QE

Powell also used his speech to let markets know the central bank would soon begin allowing its balance sheet to expand to ensure smoother functioning of U.S. short-term funding markets.

Recent spikes had raised concern that banks had an inadequate supply of reserves to manage occasional periods of high demand, and Powell's remarks on Tuesday suggested the central bank was coming around to that view and would start buying Treasury bills to replenish reserves.

This move, he emphasized several times, would be technical, had no bearing on monetary policy and "in no sense" was the same as the bond-buying the Fed conducted in the aftermath of the financial crisis to ease monetary policy.

U.S. Treasury prices rose after Powell's comments on the balance sheet, while stocks pared losses.

READY FOR ANOTHER CUT?

At separate events elsewhere, two other U.S. central bankers signaled their support for more policy easing.

"I wouldn't mind another cut. I could see it either way," Chicago Fed President Charles Evans told the Rotary Club in Chicago.

"It would help for a little more insurance. Is it necessary and essential? I'm not sure. But I'm certainly open minded to those arguments," said Evans, who supported both Fed rate cuts this year to help the Fed faster achieve its 2% inflation goal.

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In St. Cloud, Minnesota, Minneapolis Fed President Neel Kashkari said he was "generally in favor" of lower interest rates, but, "I don't know how much lower they should go."

One issue, he said, is how difficult it is to estimate the effect of trade wars on economic growth. "It's almost, your guess is as good as mine," he said.

The Fed's September rate cut, to a target range of 1.75% to 2.00%, drew three dissents out of 10 votes, two from policymakers who believed the Fed should not ease policy at all, and one from St. Louis Fed President James Bullard who wanted a bigger, half-point interest-rate cut.

Among the seven nonvoting policymakers, at least a couple also disagreed with the move, including Kashkari who had sided with Bullard.

Traders of short-term interest-rate futures are currently pricing in more than an 80% chance of a third interest rate cut this year when the Fed next meets, Oct. 29-30. Traders see a 40% chance of a fourth rate cut in December.

"We will be data dependent, assessing the outlook and risks to the outlook on a meeting-by-meeting basis, Powell said, repeating that as global risks evolve the Fed would move "as appropriate" to keep the decade-old expansion under way.

"Looking ahead, policy is not on a preset course," he said.

Much of Powell's speech centered on how a "data dependent" Fed sometimes struggled to be sure it has statistics that accurately inform it about the state of the economy.

Mismeasurement of productivity may have actually understated growth in gross domestic product in recent years, Powell said. More significantly, the revisions to the employment data showed the economy added fewer jobs than previously estimated - a fact that could bolster arguments made by some Fed officials that there is ample "slack" left in the economy and thus room for lower rates.