TEHRAN, August 26 -Federal Reserve Chair Jerome Powell has begun putting his stamp on the U.S. central bank as someone who will rely more on data-informed judgment and less on some of the models and theoretical values that have shaped the Fed’s course in recent years but that Powell has said can be false guides.
TEHRAN, Young Journalists Club (YJC) -Federal Reserve Chair Jerome Powell has begun putting his stamp on the U.S. central bank as someone who will rely more on data-informed judgment and less on some of the models and theoretical values that have shaped the Fed’s course in recent years but that Powell has said can be false guides.
In doing so he may be laying the groundwork for a longer-than-expected rate-increase cycle, as discussion intensifies among policymakers about what level of borrowing costs is appropriate in an economy that is nearly back to full health. In addition, the full stimulative effects of President Donald Trump’s tax cuts and increased government spending may not yet have presented themselves.
On the other hand, while the drag that many businesses fear could result from uncertain trade policy has not materialized, if it does it could force an earlier end to the Fed’s rate-hike cycle.
Such two-way concerns are unfamiliar territory for a Fed that under Powell’s immediate predecessors had to focus mostly on just one kind of risk: too-low inflation and sub-par growth. Now, with unemployment at 3.9 percent - below what most economists believe is sustainable — and inflation near the Fed’s 2 percent goal, the economic terrain looks less fragile.
In a keynote speech at the Kansas City Fed’s annual symposium here on Friday and in recent congressional testimony, Powell has laid out an approach he sees suitable to that new terrain. It relies on using judgment to balance risks on both sides, and he cautioned against relying too much on roughly estimated variables like the so-called neutral rate of interest.
The neutral rate is a theoretical level that in a healthy economy would neither boost nor restrain investment and spending; it can move around over time.
Powell leaned heavily on the idea that policymakers would have to feel their way to their destination, citing incidents from Fed history in which reliance on technical estimation led the central bank astray, while reliance on intuition led to better outcomes.
“It’s an informed intuition,” said Atlanta Fed President Raphael Bostic, who like other regional Fed officials talks with dozens of firms regularly to get a sense of what might show up in economic data in one or two months’ time.
With a background in markets and law, that approach may play more to Powell’s strengths, while lessening the influence of technicians who have focused on issues like estimating neutral rates of interest and full employment.
Those estimates are based on historical data and may not capture changes to the economy that are in motion but have not yet been seen in the flow of data — the sort of situation that led former Fed Chair Alan Greenspan to argue against rate increases in the late 1990s because he felt rising productivity was not fully seen in government statistics.
Source: Reuters
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