Jay Powell made his personal stamp on the Federal Reserve on Wednesday, as the new chairman vowed to speak in plain English and hold more regular press conferences as he fosters “a public conversation” about what the US central bank is up to.
The Fed’s statement after the Federal Open Market Committee meeting also bore his imprint, as Mr Powell stripped away some of the economic verbiage that cluttered its communications in recent years.
Yet Mr Powell’s break from the approach of his predecessor, Janet Yellen, was more a stylistic one than a radical change of monetary policy strategy. While analysts poring over Mr Powell’s words declared them a shift in a hawkish direction, it was clear from the Fed chair’s post-meeting press conference on Wednesday that US rates would continue to be lifted gingerly, and that the Fed’s ultimate destination was uncertain.
Mr Powell repeatedly praised the US economy’s performance, declaring it to be in “great shape”, and providing a “really good environment to be finding jobs”. Yet he hewed closely to the gradualism that Ms Yellen championed, releasing forecasts suggesting the Fed was willing to tolerate an inflation overshoot in both 2019 and 2020 rather than clamping down on price growth.
In recent years the Fed has been encouraged to go much faster in raising interest rates, Mr Powell said. “I’m really glad we didn’t.”
The overall economic picture painted by Mr Powell in his second post-meeting press conference was the sunniest for the US in recent memory. Unemployment is now on track to drop to just 3.5 per cent next year, the lowest since the 1960s, even as inflation remains close to the central bank’s 2 per cent target.
Growth this year is tipped to come in at 2.8 per cent, above the Fed’s 2.1 per cent median prediction a year ago. “If you look at household surveys, confidence is high. Look at businesses, confidence is high,” Mr Powell said. “We have a really solid economy in our hands here.”
Accordingly, the Fed is forging ahead with the rate-raising campaign that it started in December 2015, pencilling in four rate increases this year followed by another three in 2019. The Fed will “relatively soon” move rates to a neutral setting — one that neither stimulates the economy nor holds it back, Mr Powell said, teeing up a landmark moment for post-crisis central banking.
The question is what follows. If the US continues on its current vigorous trajectory it seems highly likely that the Fed will end up pushing monetary policy into restrictive territory to rein in economic excesses. The median forecast from Fed officials puts rates at 3.4 per cent in 2020, well above their estimate for the neutral rate in the longer term, which remained at 2.9 per cent.
Officials including Fed governor Lael Brainard and San Francisco Fed president John Williams have confirmed the central bank may well need to lift rates above neutral to keep the economy from overheating. While inflation remains under control in the US, the past two business cycles did not end up with high price growth but with financial instability — a risk that may bolster arguments for extra rate rises.
Nevertheless, on Wednesday Mr Powell seemed anxious to underline the uncertainty hanging over the outlook rather than sending up too many hawkish warning flares. The “puzzle” of low wage growth has yet to be resolved, he said, for example, adding that the Fed was not ready to declare victory over excessively low inflation.
In addition, estimates of the neutral interest rate are uncertain. So are the levels of other variables that go into rate-setting — such as the sustainable rate of unemployment or the potential growth rate, he said. Policymakers will to an extent be feeling their way in the dark as they reverse the stimulus put in place after the financial crash — meaning they will tread carefully. “We’ll be guided by incoming data on the economy and try to keep our minds open,” Mr Powell said.
Fed officials are aware that despite the economic momentum, serious risks are on the horizon. While the $1.5tn tax-cutting package, coupled with $300bn of federal spending increases, will boost US demand this year and next, analysts expect that fiscal stimulus to reverse sharply at the beginning of the next decade.
In addition, Donald Trump’s unpredictable trade policy risks sapping corporate confidence and dragging on the financial markets and broader economy. Mr Powell trod carefully when asked about the White House’s tariffs, insisting that he detected no ill-effects in the US data, but he also revealed that the Fed’s own conversations with bosses suggest that corporate concerns were increasing.
Diane Swonk, chief economist at accounting firm Grant Thornton, said the Fed’s plan to lift its key interest rate from a benign level was an affirmation of the US economy’s strength. But she added: “The risks are from external policy decisions including a fiscal cliff in October 2019 and the danger of a trade war. The Fed has no control over either.”