Powell Just Said It’s His Fed Now
(Bloomberg Opinion) -- Jerome Powell became chairman of the Federal Reserve in February, but two very short — and very new — words he proclaimed to Congress this week signaled the approach of an important new phase in U.S. central banking.
The coming period will be one he owns. It won’t be guided by cruise control, will be more data-driven and might reflect a gut feel for the economy, given Powell’s background in private equity rather than academic economics.
The two words were “for now,” and they appeared near the end of Powell’s five-page prepared remarks to Senate Banking Committee, where he testified on Tuesday. They were inserted into an otherwise routine sentence explaining that the Federal Open Market Committee of Fed members and regional central bankers believes that the best path is to keep raising interest rates gradually, as the Fed has been doing since 2015. Powell was careful to add that rates could rise faster or slower, depending on circumstances. Fed watchers tended to interpret the comments to mean that the Fed would be disinclined to raise rates aggressively. Traders were skeptical and pushed the dollar higher.
Until now, Powell has operated within the framework that he inherited from his predecessor, Janet Yellen. That approach has been characterized by a quarter-point increase in interest rates every three months at the moment the Fed publishes quarterly projections for jobs, growth and inflation.
His task has been made easy by an economy that’s behaved as anticipated. The expansion is humming along, the unemployment rate grinds lower and inflation has finally risen to the Fed’s 2 percent target rate. The FOMC has been able to incrementally and predictably take back some of the stimulus pumped into the economy during the 2008 recession and its aftermath. The aim was to move toward an interest-rate level that neither stimulates nor restricts growth.
That neutral-rate nirvana was seen as coming, but not immediately. Powell’s “for now” was an effort to speed things along.
Speeches by Fed officials, minutes of meetings and anecdote-driven business surveys like the Fed’s Beige Book will be more closely scrutinized. The FOMC’s next scheduled meetings in August and September are too close to expect a change in the rate trajectory. From then on, be on alert. Four rate hikes this year, foreshadowed in June, would get the benchmark rate to a range of 2.25 percent to 2.5 percent. That’s not far from the 2.9 percent the Fed views as sustainable over the long run, kind of a proxy for neutrality.
There were other refreshing Powell touches before the Senate. Baited by senators eager for Fed action to influence trade, fiscal policy, productivity and education, he was direct about where his responsibilities begin and end. To Senator Tim Scott of South Carolina: “I’m really firmly committed to staying in our lane.” To Senator Brian Schatz of Hawaii: “These are things for the legislature to work on.” To Catherine Cortez Masto of Nevada: “We don’t have those tools, you have those tools.”
I wrote in February after Powell’s first congressional testimony that he was his own man. He’s about to have his own era. If that era is characterized by an end to investor complacency in the face of global disruptions like trade conflict and alliance-shattering, that would be a public service. All the more so if a less formulaic approach to managing the economy can guide the U.S. expansion to record territory. It’s now the second-longest, after the 1990s. Jay Powell, all yours.
Daniel Moss writes and edits articles on economics for Bloomberg Opinion. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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