Can the Fed Engineer the Best Economy Since the 1960s? Chairman Powell Is Going to Try

Can the Fed Engineer the Best Economy Since the 1960s? Chairman Powell Is Going to Try


Keeping a strong economy running hot, but not so hot as to risk inflation or a bubble, is the task facing the Fed’s new leader.

By Neil Irwin

March 21, 2018
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Jerome Powell, the Fed chairman, at a news conference on Wednesday. “One risk is we wait too long” on interest rate increases “and have to raise rates quickly and that foreshortens the expansion,” he said.CreditAlex Wong/Getty Images
When Jerome Powell presided over his first policy move as chairman of the Federal Reserve on Wednesday, it was against a backdrop of very good economic news: Unemployment is low and falling; inflation is low and stable; financial markets remain buoyant.

That is also the bad news.

That’s because there are a lot more ways for the economy to get worse than to get better. Mr. Powell faces the tricky task of trying to keep growth going, and his success as the nation’s most powerful economic policymaker will depend on his ability to judge the various risks to the current expansion.

Within the announcement that the Fed will raise its interest rate target a quarter of a percentage point to a range of between 1.5 percent and 1.75 percent, there are signs that Mr. Powell and his colleagues think they can lead the nation to even greater prosperity while keeping the inevitable risks created by that growth — inflation and financial bubbles — under control.

If all goes according to plan, this would imply that the United States economy in 2019 and 2020 will be the healthiest it has been in half a century. Fed officials project the lowest unemployment rate since 1969, paired with more modest inflation than was experienced that year.

To use a common monetary policy metaphor in which a central banker is the driver of a car that represents the economy, Mr. Powell expects to be able to keep going at high speed, even as he taps the brakes harder, and all without the engine overheating.

Mr. Powell delivered crisp answers in his first news conference, which at about 45 minutes was 15 minutes shorter than the sessions typically held by his Ph.D. economist predecessors Janet Yellen and Ben Bernanke (Mr. Powell has a law degree). He said at one point he seeks to take a “middle ground” on policy.

“One risk is we wait too long” on interest rate increases “and have to raise rates quickly and that foreshortens the expansion,” Mr. Powell said. “We believe that the middle ground consists of continued gradual increases in the federal funds rate,” which is the short-term rate the Fed targets.

The written materials published Wednesday about the rate increase — which signal the views of Mr. Powell and the entire policymaking committee he leads — included new language that “the economic outlook has strengthened in recent months.”

And, consistent with that view, the policymakers’ economic projections represent meaningful upgrades from those officials’ expectations in December. The median Fed official now expects gross domestic product to rise 2.7 percent this year and 2.4 percent next year, up from the previous projections of 2.5 percent and 2.1 percent.

They now expect the jobless rate to decline to 3.6 percent from the current 4.1 percent, and stay there through the end of 2020. Even in the boom of the late 1990s, the jobless rate reached 3.8 percent for only a single month and never fell below that level.

In the Fed’s projections, this would be accompanied by inflation that rises to — and just temporarily above — the 2 percent target the central bank has set. The Fed has long asserted that it is just as dissatisfied when inflation comes in below the number as above it. But investors have been skeptical; with the median forecast of 2.1 percent inflation in 2020, Fed officials have put their projections where their mouths are.

Those economic projections signal that Mr. Powell and his colleagues believe they can keep running the economy a little hot with mainly good results.

But they seem to believe that a more aggressive shift toward higher interest rates will be needed to keep that benign future intact. This very rosy vision for the economy in 2020 depends, if you take their projections and comments at face value, on the Fed’s stepping up its rate increases.

Just focusing on the median of Fed officials’ forecasts for interest rates, as Mr. Powell emphasized in his news conference, can mask the degree of the shift.

In December, the “central tendency” of Fed officials’ projections was for an interest rate target of between 2.4 percent and 3.1 percent at the end of 2019; that range has now shifted up to 2.8 percent and 3.4 percent.

In effect, Mr. Powell seems to be rejecting ideas recently put forward by various economic pessimists.

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