Federal Reserve Chairman Jerome Powell appeared on the CBS Sixty Minutes program on Sunday evening, doing something that Fed Chairmen usually don't do.
Federal Reserve Chairmen usually try and stay out of the limelight, especially facing interviews one-on-one with a national news program.
For one thing, the words of a Fed Chair can set off markets. One slight misstatement or one off-the-cuff remark can be taken and interpreted in ways that can do great harm to financial markets or the economy.
So, Fed Chairmen do not usually put themselves into such risky situations.
Even the appearance of the Fed Chair on a program like Sixty Minutes can cause eyes to turn. Just the fact that I am writing this post is a sign of the significance of such an interview. And, former Fed Chairs Ben Bernanke and Janet Yellen also appeared on the program.
What I read into this appearance is a concern on the part of Mr. Powell and the Federal Reserve that the economic and financial situation is such that the leadership at the Fed felt that it was necessary to get Mr. Powell out in front of the public and provide the people some confidence that the Federal Reserve was "on top" of the situation, was not panicking, and would calmly see the country through the current situation.
And, what is the situation?
Well, in spite of the fact that the current economic recovery taking place in the United States will reach a record length of ten years at the end of this month, there are growing doubts about how much longer this can go on.
In fact, Mr. Powell was specifically asked this question and responded, very calmly, that it could go on for quite some time. The expansion will end sometime, Mr. Powell stated, but he did not see the end coming in the near term.
It is true that Federal Reserve projections of economic growth for the future indicate that the economy will slow down from the recent 2.9 percent rate of growth attained in 2018, but the drop-off seen over the next two to three years is only down to around 2.0 percent. That is, the economic expansion will continue, albeit at a more modest pace.
But there are some other ominous signs that the Fed must deal with.
For example, the US Treasury yield curve has become inverted. Late last year, the yields on short-term Treasuries became higher than the yields on longer-term issues. Historically, an economic recession has followed such a yield curve inversion.
In addition, some economic data coming in now seem to point to a substantial slowdown in economic growth. Activity in the manufacturing sector seems to be going through a period of weakness.
Bob Tita writes in the Wall Street journal,
"Factories are on track for their weakest showing this year since 2016. Manufacturing job growth has stalled since late last year and output has fallen in three of the past four months as demand for business equipment and commodities weakens in the U.S. and abroad."
"Manufacturing accounts for 11% of U.S. gross domestic product, according to the Bureau of Economic Analysis, down from 16% two decades ago. Its strong growth last year helped total GDP rise by 2.9%."
Furthermore, there is the uncertainty that has been added to economic markets due to the increased talk of tariffs, most recently with Mexico, and trade wars with others around the globe, especially China.
Mr. Powell indicated that the Federal Reserve was watching the world situation and was prepared to act in the case that it was needed.
All in all, I thought that Mr. Powell did a credible job and avoided making any major mistakes.
However, he was reluctant to step out too far and let out any real picture of the future.
The basic message was, we are on top of things and will handle events as they develop.
There is more talk about the possibility that the Fed will actually consider lowering its policy rate of interest this year, maybe even twice, and, of course, the Fed has already stated that it will stop reducing the size of its securities portfolio later this year. So, it looks as if the Fed has done all that it will do to return interest rates and its securities portfolio to a "more normal" level.
Implicit in Mr. Powell's performance, I believe, is the assurance that the Fed will continue to err on the side of monetary ease so as to avoid an uncomfortable dislocation of financial institutions and financial markets.
The Federal Reserve provided this assurance, sometimes more explicitly than at other times, throughout the entire period economic recovery following the Great Recession.
In his understated way, I believe that Mr. Powell extended this "downside" protection into the indefinite future. And, I believe that he means it.
A year ago or so, there was a concern that the economy might actually grow narrower to 3.0 percent and that inflation might actually begin to raise its head. But, as we now know, this didn't happen.
The manufacturing data cited above seems to indicate that the supply side of the economy is still the major factor determining economic growth these days so that modest growth continues to dominate. Federal Reserve actions are not going to do much, one way or another, to produce faster growth.
Therefore, the Federal Reserve must keep to a steady position while keeping its eyes on what could happen on the downside. I believe that this is Mr. Powell's intent.
Such a policy stance will not produce the widely robust economy desired by President Trump, but it will continue to support the steady, if unspectacular growth observed during the current ten-year recovery. And, this might just be what is needed right now.
Mr. Powell spent time at the end of his interview discussing a problem he sees as a major one in the US economy… the low labor force participation rate. Technological change has caused many, especially a lot of younger people, to drop out of the labor force. Mr. Powell believes that this issue really needs to be addressed.
Wouldn't this be a good time to address this issue with the economy growing and with unemployment at a fifty-year low? Addressing this issue, however, is not something the Federal Reserve can do, and it is a long run issue, not a short-term one. But we could do it right now.
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