“It’s very hard to say with any certainty how this is going to play out,” Powell told reporters this week. “…Nobody knows if this process will lead to a recession, or if so, how deep that recession would be.”
Public statements of doubt are rare in official Washington. But they’ve become commonplace for Powell, 69, whose frankness reflects the uncertainties shrouding the global economy and a revolution in Fed communications since the days when then-Chairman Alan Greenspan cultivated an image of unique economic mastery.
But Powell’s final remarks come as The Fed’s fight against inflation is progressing slowly, leaving the institution and its boss vulnerable to criticism about the cost to workers and businesses of continued rate hikes.
On Friday, the Dow Jones industrial average fell for the fourth straight day, dipping below 30,000 for the first time since June and erasing everything investors had gained since November 2020.
“People look to the Fed as the best source of where we are going. The Fed has information. You have a highly qualified staff. They have no political reason to hide the ball,” said Claudia Sahm, a 12-year Fed economist. “Everyone wants to know where we are next year… But the truth is, the Fed is just as blind as the rest of us.”
After erroneously predicting inflation would prove “temporary” for most of last year, Powell has stressed the complexities involved in recovering the $25 trillion US economy as it emerges from being shaken by an unusual mix of forces.
In fact, nobody has seen an economy like the current one. Confused supply chains. Soaring global food and fuel prices triggered by Russia’s invasion of Ukraine. Ongoing factory closures in China due to an unpredictable pandemic.
The cumulative impact has repeatedly surprised Fed forecasters, Wall Street analysts, White House officials and corporate executives. Current inflation readings are “not where we expected or wanted to be,” Powell admitted this week.
Even with the additional rate hikes planned, the Fed does not expect annual inflation to return to its price stability target of 2 percent before the end of 2025.
“You have to take your best guess with limited data and limited understanding,” said Marc Chandler, Managing Director of Bannockburn Global Forex. “Not only is the Fed acknowledging that it was so wrong, but that there is no playbook. How do you play these multiple shocks?”
Deep uncertainty is not letting the Fed slow down.
Powell’s comments to reporters on Wednesday came as he unveiled the central bank’s fifth rate hike this year, all aimed at slowing the economy and easing pressure on prices. Since March, the Fed has raised interest rates by a full 3 percentage points, the fastest hike of this magnitude since 1982.
The Fed chair said rates are likely to rise another point and a half before the end of the year. Some economists think the central bank should pause to assess the impact of its past efforts to slow the economy before enacting further hikes. But Powell’s bet is that the costs of losing control of inflation outweigh the dangers of pushing the economy into recession.
To dispel some of the analytical fog, the Fed also released its top officials’ quarterly economic forecasts this week.
Wall Street analysts ponder the numbers, which provide the best guide to the assumptions guiding monetary policy.
However, Powell suggested that the forecasts, which are specified to within a tenth of a percentage point through 2025, are incorrectly accurate.
“No one knows for sure where the economy will be in a year or more,” he said.
That’s a polite way of saying that the Fed’s best guesses are often wrong. Earlier this year, for example, the median forecast for the Fed’s preferred measure of inflation called for prices to rise 2.6 percent this year.
The latest estimate now puts inflation at 5.4 percent this year, more than double the original forecast.
“What Powell is doing is communicating that the direction of the economy is ambiguous and how they may need to respond is equally uncertain,” said Nathan Sheets, Citigroup’s chief global economist. “We are at a time when many of the Fed’s models and equations have gone haywire. Because of this, they have less insight into how the economy is developing.”
The Fed only began releasing these internal forecasts in 2007, as part of then-Fed Chairman Ben Bernanke’s effort to encourage more transparency into central bank deliberations. In 2011, Bernanke also began holding a quarterly press conference to discuss the Fed’s thinking.
Under Greenspan, who chaired the Fed from 1987 to 2006, the central bank has remained largely silent. There were no regularly scheduled press conferences, no public releases of official projections, and Greenspan prided himself on a deliberately impenetrable style of public speaking.
“If I’m being particularly explicit, you probably misunderstood what I said,” he told an audience.
Greenspan was fortunate to command the Fed after the high inflation of the 1970s was wiped out. His tenure also coincided with a technology-driven 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 US economy thrived and the stock market soared, so did Greenspan’s reputation.
“Greenspan has benefited from being Fed chairman at a time when many of the shocks have been favorable,” Sheets said. “When things are going right in business, it’s a lot easier for a politician to look brilliant.”
Powell didn’t have that luxury. A veteran corporate attorney and investment banker, he was appointed to the post in 2018 by former President Trump – who routinely berated him on Twitter – and was reappointed to a second four-year term by President Biden earlier this year amid the worst inflation in four decades.
To combat annual consumer price inflation of 8.3 percent, the Fed plans to hike interest rates until the economy slows. Higher credit costs have already plunged the housing market into the downturn, and Powell has warned that beating inflation will mean “pain”.
As economic weakness spreads, employers will first cut vacancies and then start laying off workers, economists said.
The Fed expects the unemployment rate to rise from 3.7 percent to 4.4 percent next year. Many private forecasters are rather downcast. Bank of America economists said Friday the unemployment rate will peak at 5.6 percent in December 2023, implying a spate of pink slips that could cost more than 3 million Americans their jobs.
The central bank’s actions are already hurting investors. Global stock markets have lost $12 trillion since the Fed began raising interest rates in March, according to data compiled by Bloomberg.
Powell’s extensive effort to explain to Americans what’s going on with the economy has raised some doubts. After the Fed Chair’s last press briefing, Lawrence Summers, the former Treasury Secretary, questioned on Twitter “whether the Fed’s credibility is well served by frequent hour-long dialogues about hypotheses and the unpredictable.”
Chairman Powell is thoughtful at press conferences, but I wonder if the Fed’s credibility is well served by frequent hour-long chats about hypotheses and the unpredictable in a volatile market environment.
— Lawrence H Summers (@LHSummers) September 21, 2022
The Fed “should consider the idea of TMI,” an acronym for too much information, Summers added.
Despite the snark, financial markets still believe the Fed will deliver on its promise to dampen rising prices. Investors expect inflation to average 2.4 percent over the next 10 years, as inferred from US Treasury yields. That’s down from 3 percent in April and close to the Fed’s target.
It is worth remembering that Greenspan’s reputation for know-it-all did not last. During the 2008 financial crisis, as trillions of dollars in wealth evaporated and unemployment swelled, critics in Congress cited the near-collapse of the US banking system as evidence that his faith in the industry’s ability to control itself was out of place.
Testifying before the House Government Oversight Committee in October 2008, Greenspan admitted that the crisis had exposed “a flaw” in his thinking.
“I still don’t fully understand why this happened,” he said.
His successor wants to do better. Powell has vowed to beat inflation at any cost or time. Not having all the answers is no excuse for inaction.
“Inflation is running too high,” Powell concluded. “You really don’t need to know much more than that.”
