Federal Reserve Chair Jerome H. Powell acknowledged this week that there are a few things he does not know about the U.S. economy.
“It’s very hard to say with precise certainty the way this is going to unfold,” Powell told reporters this week. “No one knows whether this process will lead to a recession or, if so, how significant that recession would be.”
Public confessions of doubt are rare in official Washington. But they have become commonplace for Powell, 69, whose candor reflects the uncertainties shrouding the global economy as well as a revolution in Fed communications since the days when then-Chairman Alan Greenspan cultivated an image of singular economic mastery.
But Powell’s latest remarks come as the Fed’s anti-inflation fight is making only slow progress, leaving the institution and its boss vulnerable to criticism over the cost to workers and businesses of continued rate hikes.
On Friday, the Dow Jones industrial average fell for the fourth straight day, sinking below 30,000 for the first time since June and wiping out everything investors had gained since November 2020.
“People look to the Fed as the best source on where we’re going. The Fed has information. They have a highly-trained staff. They have no political reason to hide the ball,” said Claudia Sahm, who spent 12 years as a Fed economist. “Everyone wants to know where we’ll be next year. … But really the Fed is just as blind as the rest of us.”
After wrongly predicting for most of last year that inflation would prove “transitory,” Powell has emphasized the complexities involved in righting the $25 trillion U.S. economy as it is buffeted by an unusual mix of forces.
Indeed, no one has seen an economy like the current one. Snarled supply chains. Soaring global food and fuel prices, triggered by Russia’s invasion of Ukraine. Rolling factory shutdowns in China resulting from an unpredictable pandemic.
The cumulative impact has repeatedly surprised Fed prognosticators, Wall Street analysts, White House officials and corporate executives. Current inflation readings are “not where we expected or wanted to be,” Powell conceded this week.
Even with the additional, planned rate hikes, the Fed does not expect annual inflation to return to its 2-percent price-stability target before late 2025.
“You have to make your best guess with limited data and limited understanding,” said Marc Chandler, managing director for Bannockburn Global Forex. “The Fed recognizes, not only that it’s been so wrong, but that there’s no playbook. How do you play these multiple shocks?”
Profound uncertainty is not causing the Fed to go slow.
Powell’s comments to reporters on Wednesday came as he unveiled the central bank’s fifth interest rate increase this year, all designed to slow the economy and ease pressure on prices. Since March, the Fed has lifted its benchmark lending rate by a full 3 percentage points, the fastest increase of that size since 1982.
The Fed chief said rates probably will rise by an additional point-and-a-quarter before year end. Some economists think the central bank should pause to evaluate the impact of its earlier efforts to slow the economy before implementing further increases. But Powell’s bet is that the costs involved in losing control of inflation outweigh the dangers of pushing the economy into a recession.
To dispel some of the analytical fog, the Fed this week also released its top officials’ quarterly economic forecasts.
Wall Street analysts pore over the figures, which represent the most authoritative guide to the assumptions guiding monetary policy.
Yet, Powell suggested that there is a false precision to the projections, which are specified down to one-tenth of a percentage point through 2025.
“No one knows with any certainty where the economy will be a year or more from now,” he said.
That’s a polite way of saying that the Fed’s best guesses are often wrong. At the beginning of this year, for example, the median projection for the Fed’s preferred inflation gauge called for prices to rise this year by 2.6 percent.
The latest estimate now calls for inflation this year to be 5.4 percent, more than twice the initial forecast.
“What Powell is doing is communicating that the evolution of the economy is ambiguous, and how they may need to respond is equally uncertain,” said Nathan Sheets, global chief economist for Citigroup. “We’ve moved into a period where many of the Fed’s models and equations have gone off track. They have less visibility for that reason into how the economy is going to evolve.”
The Fed began releasing these internal forecasts only in 2007 as part of an effort by then-Fed Chair Ben Bernanke to promote greater transparency in the central bank’s deliberations. In 2011, Bernanke also began holding a quarterly news conference to discuss the Fed’s thinking.
Under Greenspan, who served as Fed chair from 1987 to 2006, the central bank was mostly mute. There were no regularly scheduled news conferences, no public releases of officials’ projections, and Greenspan prided himself on a deliberately impenetrable public speaking style.
“If I turn out to be particularly clear, you've probably misunderstood what I said,” he told one audience.
Greenspan was fortunate to command the Fed after the high inflation of the 1970s had been extinguished. His tenure also coincided with a technology-infused productivity boom and the early financial gains associated with China’s entry into the global trading system, which helped keep inflation low for years.
As the U.S. economy flourished, and the stock market soared, Greenspan’s reputation rose as well.
“Greenspan benefited from being the Fed chair through a period when many of the shocks were favorable,” Sheets said. “When everything’s going right in the economy, it’s much easier for a policymaker to look brilliant.”
Powell has not had that luxury. A veteran corporate lawyer and investment banker, he was appointed to the post in 2018 by former president Donald Trump — who routinely berated him on Twitter — and reappointed for a second four-year term by President Biden earlier this year amid the worst inflation in four decades.
To fight annual consumer price inflation of 8.3 percent, the Fed plans to raise interest rates until the economy slows. Making credit more expensive already has sent the housing market into decline, and Powell has warned that conquering inflation will mean “pain.”
As economic weakness spreads, employers first will eliminate open positions and then begin laying off workers, economists said.
The Fed expects the unemployment rate to rise to 4.4 percent next year, from today’s 3.7 percent level. Many private forecasters are more downbeat. Economists at Bank of America on Friday said the jobless rate will peak at 5.6 percent in December 2023, implying a flood of pink slips that could cost more than 3 million Americans their jobs.
The central bank’s actions are already hurting investors. Since the Fed began raising interest rates in March, global stock markets have lost $12 trillion in value, according to data compiled by Bloomberg.
Powell’s extensive efforts to explain to Americans what is happening with the economy have attracted some second-guessing. After the Fed chair’s latest news conference, Lawrence Summers, the former treasury secretary, questioned on Twitter “whether the Fed’s credibility is well served by frequent hour long dialogues on hypotheticals and the unforecastable.”
Chairman Powell is very thoughtful at press conferences but I wonder whether the Fed's credibility is well served by frequent hour long dialogues on hypotheticals and the unforecastable, with the backdrop of gyrating markets.— Lawrence H. Summers (@LHSummers) September 21, 2022
The Fed “should consider the idea of TMI,” shorthand for too much information, Summers added.
Despite the snark, financial markets still believe that the Fed will deliver on its promise to subdue rising prices. Investors anticipate inflation averaging 2.4 percent over the next 10 years, according to market gauge derived from the yields on U.S. Treasury securities. That’s down from 3 percent in April and close to the Fed’s goal.
It’s worth remembering that Greenspan’s reputation for omniscience did not last. During the 2008 financial crisis, as trillions of dollars in wealth vaporized and the jobless ranks swelled, critics in Congress cited the near collapse of the U.S. banking system as evidence that his faith in the industry’s ability to police itself had been misplaced.
Testifying in October 2008 before the House Government Oversight Committee, Greenspan confessed that the crisis had exposed “a flaw” in his thinking.
“I still do not fully understand why it happened,” he said.
His successor is determined to do better. Powell has vowed to defeat inflation, whatever the cost and time required. Not having all the answers is no excuse for inaction.
“Inflation is running too high,” Powell said in conclusion. “You don’t really need to know much more than that.”