Fed Chairman Powell to Markets: I Hear You

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 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.

Article source: https://www.nytimes.com/2019/01/04/upshot/fed-chair-jerome-powell-reassures-markets-.html?partner=rss&emc=rss