Brexit shifts global risks further to downside

Bloomberg

Federal Reserve Governor Jerome Powell said global risks have shifted further to the downside after Britain’s vote to exit the European Union, introducing new uncertainties that may merit reassessing
monetary policy.
“The Brexit vote has the potential to create new headwinds for economies around the world, including our own,” Powell said in remarks prepared for delivery to the Chicago Council on Global Affairs. “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.”
The UK’s June 23 decision to leave the EU touched off market turmoil and spurred central banks including the Fed to assure investors that they were prepared to provide liquidity to the system, a promise Powell reiterated. The Fed governor also discussed his outlook for the U.S. economy, and said that monetary policy needs to stay easy.
“Weakness in economic activity around the world and related bouts of financial volatility have weighed on the performance of our economy,” Powell said. “Monetary policy will need to remain supportive of growth, as we work through the challenging global environment.”
Though financial conditions have tightened in the wake of the Brexit vote, Powell said markets have continued to function in an orderly manner.
Powell said that labor market strength has been a “key feature of the recovery” that has allowed the Fed to look through output growth fluctuations, making weak April and May jobs data “worrisome.” He said the Fed has “more work to do to assure that inflation moves back up to our 2 percent goal,” and that it’s essential to make sure inflation expectations remain anchored.
Because the interest rate that would keep the economy operating at an even keel with full employment and stable prices has fallen, “policy is actually only moderately stimulative” today, Powell said in his remarks. He added that he expects the so-called “neutral rate” to move up over time.
Powell also warned that many economies, including the US, risk falling into a post-financial crisis state where both
potential output and the growth rate are permanently reduced.
“We need policies that support labor force participation and the development of skills, business hiring and investment, and productivity growth,” Powell said. “For the most part, these policies are outside the remit of the Federal Reserve, but monetary policy can contribute by supporting a strong and durable expansion, in a context of price stability.”