Jerome Powell is Still Puzzling Over the Strength of the U.S. Economy


We are now more than three and a half years out from the start of the covid-19 pandemic, which upended the global economy, and economists and policymakers are still surprised by the strength of the economic rebound in the United States. Most recently, both hiring and retail spending have picked up. A couple of weeks ago, the Labor Department announced that employers created three hundred and thirty-six thousand jobs last month. Earlier this week, the Census Bureau said retail sales rose by 0.7 per cent in September, on a seasonally adjusted basis, more than twice as fast as economists were expecting.

More hiring and consumer spending translate into more output. According to the Atlanta Federal Reserve’s GDPNow estimate, G.D.P. expanded at an annual rate of 5.6 per cent in the third quarter of the year, or from July 1st to September 30th. Growth rates bounce around from quarter to quarter, but that’s a big number. Next week, the Commerce Department will release its initial estimate of the actual third-quarter figure. If it’s anything like what the Atlanta Fed estimates, it will represent a significant acceleration in G.D.P. growth from the 2.1-per-cent rise in the second quarter.

The economy’s continued strength is good news for workers and businesses, and it should also be good news for President Biden, although opinion polls don’t show much evidence of that. (More on that below.) But it represents a conundrum for Jerome Powell, the chairman of the Federal Reserve, and his colleagues, who, over the past twenty months, have raised short-term interest rates from practically zero to more than five per cent, in an attempt to bring down inflation without sending the economy into the ditch. On the face of things, this policy has succeeded far beyond expectations. Between September, 2022, and last month, the headline rate of inflation fell from 8.2 per cent to 3.7 per cent. At the same time, economists’ predictions that the Fed’s policy tightening would bring about a major economic slowdown, or even a recession, have turned out to be wrong—at least so far.

Why, then, isn’t Powell declaring victory and celebrating having achieved the fabled “soft landing” for the economy? Mainly because the inflation rate is still above the Fed’s target of two per cent. The recent pickup in economic activity has defied the Fed’s own predictions and raised fears in policymaking circles that inflation could get stuck in its current range. As long as wages keep pace with price rises, that wouldn’t necessarily be a terrible thing—there’s nothing magic about the two-per-cent inflation target—but Powell and his colleagues are committed to restoring price stability.

To Powell’s credit, he has shown humility over the Fed’s failure, along with the rest of the economics profession, to predict the economy’s course. In an appearance at the Economic Club of New York on Thursday, he said, “We should be seeing the effects” of higher interest rates, but added that there is a lot of uncertainty about the lags in monetary policy. He went on: “We have models for everything. We have formulas for everything. Ultimately, as a practitioner, we have to be focussed on what the economy is telling us.”

One message the economy may well be sending is that the full impact of the Fed’s interest-rate hikes has yet to be felt, or, as Powell put it, “There may still be significant tightening in the pipeline.” Higher interest rates affect the economy through three main channels: they raise the cost of borrowing, they tend to lead to falls in asset prices, and they strengthen the dollar. So far, though, these effects have been offset by strong job growth, which feeds through into higher incomes, and the lingering impact of the pandemic stimulus programs, which boosted government spending and strengthened household finances.

Source: The New Yorker