Fed Chairman Powell to Markets: I Hear You

Fed Chairman Powell to Markets: I Hear You

ATLANTA — It was only 16 days ago when the Federal Reserve raised interest rates and its chairman, Jerome Powell, conveyed that he was fundamentally confident about the outlook for the United States economy.

To markets, he came across as excessively dismissive of the message that turbulent stock, bond and commodity prices were sending. His comments were interpreted as implying the Fed was dead-set on pushing interest rates higher to prevent some hypothetical future inflation, consequences be damned.

It’s clear that a jaw-dropping series of market swings, combined with some hints that a broader economic slowdown could be on the way, have made Mr. Powell rethink things.

Two weeks ago, the consensus of Mr. Powell’s Fed colleagues was that two more interest rate increases were likely this year. In his message Friday, in a panel at the American Economic Association, he decidedly did not reaffirm that projection. Instead, his emphasis was on flexibility, adaptability and open-mindedness.

The markets loved it — and why wouldn’t they? Mr. Powell’s appearance essentially repaired the damage from his indifferent tone of two weeks ago.

The market response Friday — the S&P 500 was up more than 3 percent in the afternoon — was to his opening comments, which Mr. Powell read from notes. It was a deliberate and precise effort, not some off-the-cuff remarks. Sometimes, markets overreact to extemporaneous remarks a Fed chief makes in a news conference or in a congressional hearing; this was not one of those cases.

It also helped that the dovish message arrived less than two hours after an employment report that showed exceptionally strong job growth in December.

For certain monetary policy traditionalists, the robust wage growth in that report — up 3.2 percent over the past year — could point to inflation worries. But in the panel, Mr. Powell made a point of saying the wage growth number did not alarm him and should not be taken as a signal that prices were set to spiral out of control.

It is a safe bet that the Fed will not be raising rates in the early months of 2019, and will resume its tightening campaign only once the global outlook is clearer, or once a more substantial inflation risk appears in the United States.

It’s particularly clear that the lessons of history loom large in Mr. Powell’s thinking. In 2015 and early 2016, when he was a Fed governor and Janet Yellen was chairwoman, an eerily similar episode dragged down U.S. economic growth down so much that it can be thought of as a mini-recession.

In that episode, the Fed’s push to raise interest rates helped fuel a vicious cycle of slower growth overseas, falling commodity prices, a stronger dollar and lower inflation.

There are differences this time around — in particular, a trade war with China is a big factor in the slowdown in Chinese growth. Another difference is that the United States economy is stronger now, with an unemployment rate below 4 percent for six straight months, making the overheating risk in the United States higher.

But the similarity comes in the ways that actions taken by Fed officials in Washington can ripple around the globe and come back to bite the United States economy in unpredictable ways.

The fact that Mr. Powell brought up the episode from 2015 and early 2016 — in the prepared portion of his comments, and in response to an open-ended question about the economy — is a sign that he thinks it is relevant to current policy.

Will 2019 be as hard a year for the economy as financial markets seem to be bracing for? The economic data is still quite strong, none more so than the latest job numbers. But, as Mr. Powell said, those are backward-looking indicators, and the Fed must make policy by looking forward.

The loud-and-clear message is that Mr. Powell and his colleagues aren’t going to put their hands over their ears, ignore these messages from markets, and carry on as planned.

And that, in turn, seems to make some of the darker possibilities for 2019 a lot less likely.

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