After four years managing the monetary tremors and rescues surrounding a near-biblical pandemic, countering a war-related energy shock and – together with government – neutralising a potentially viral regional banking blowup this year, Powell’s Fed looks in control. — Reuters
NOT bad for a “clueless” Federal Reserve (Fed) chair.
If the US economy has a “soft landing” – no recession this year with inflation near target, and only a mild downturn next year with unemployment staying historically low – Jerome Powell may lay claim to being the most successful Fed chief in history.
The way the economic stars are aligning, that scenario is well within the realms of possibility. Recession forecasts are being pushed back or cut, and Powell and Janet Yellen – his predecessor and current Treasury secretary – both think there will be no recession at all.
After the most aggressive interest rate-hiking campaign since the early 1980s – 500 basis points in barely 18 months – that would be a remarkable achievement on its own.
But after four years managing the monetary tremors and rescues surrounding a near-biblical pandemic, countering a war-related energy shock and – together with government – neutralising a potentially viral regional banking blowup this year, Powell’s Fed looks in control.
It would also represent quite a turnaround in personal fortunes for the now 70-year old Republican first nominated by former President Donald Trump in 2017.
Public lashings
Powell was frequently on the receiving end of public lashings from his then boss – “clueless,” “horrendous lack of vision” and “pathetic” were some of Trump’s tweets about his central bank chief in 2019.
One can only speculate how Trump would have reacted to the historic policy tightening cycle now drawing to a close were he still president. It’s unlikely he would have been supportive as stocks and bonds plummeted through 2022.
Yet Powell may soon be vying for a crown most orthodox economists say belonged to Paul Volcker or Alan Greenspan.
“Kudos to Powell if he can achieve a soft landing. Volcker still heads the pantheon of central bankers, but Powell would eclipse Greenspan,” said Joe LaVorgna, chief economist at SMBC Nikko Securities and a former economic adviser in the Trump White House.
Volcker was Fed chair between 1979 and 1987, famously “breaking the back” of inflation in the early 1980s by raising rates to as high as 19%. He killed inflation, but at a cost – the unemployment rate shot up to 11%, the highest since 1940 until the Covid-19 pandemic, while inequality exploded.
Greenspan, dubbed “the Maestro” by his admirers, was Fed chief from 1987 to 2006. Under his guidance in the mid-1990s the Fed raised rates to cool an overheating economy without triggering recession for the only time in its history – what his vice- chair Alan Blinder called the “perfect soft landing.”
But his disdain for financial regulation and default position of fuelling market bubbles with low interest rates were instrumental in sowing the seeds of the housing market bubble and crash that culminated in the 2007-2009 Great Financial Crisis.
Recession probabilities fall
This is a parlour game that cannot be played without taking other factors – fiscal policy, global conditions and luck – into account, and Powell has almost certainly benefited from all three.
But so far at least, the economy is defying all the odds.
Several economic and financial indicators have been screaming recession for months, yet there is nothing in the official data. First-quarter growth was revised sharply higher.
Lower probability
Goldman Sachs chief economist Jan Hatzius cut his 12-month recession probability to 20% from 25%, the lowest in a year.
“The recent data have reinforced our confidence that bringing inflation down to an acceptable level will not require a recession.”
This remains slightly above the long-term average of 15% – a recession has occurred approximately every seven years, Hatzius notes – but well below current consensus.
A Reuters poll of economists in June showed that 60% of respondents expected recession this year, compared with more than 70% in a poll just a few weeks earlier.
A New York Fed model based on the shape of the three-month/10-year yield curve puts a two-in-three chance of recession over the next year.
The unemployment rate now is 3.6%, near its lowest in half a century. It has averaged 5.7% over last 75 years, 6.2% over the last 50 years and 5.7% over the last 25 years. Even if it creeps up towards 5% that would still be historically low.
Annual inflation is 3% and disinflationary forces are gaining strength.
The Fed’s 2% target is in sight and money markets only expect the Fed to raise rates once more before pausing for the rest of this year and easing aggressively next year.
By those metrics, Powell appears to be doing a decent job. But someone had better tell Joe public.
According to a Gallup poll in May, public confidence in Powell was the lowest in his tenure. Not only that, his 36% rating was the lowest of any Fed chair since the survey series began in 2001. —Reuters
Jamie McGeever a Reuters columnist. The views expressed here are the writer’s own.
