Mar 16, 2022 - Economy

Fed's Powell bets on a buoyant economy

Fed Chair Jerome Powell at his news conference

Jerome Powell, on the screen. Photo: Michael Nagle/Bloomberg via Getty Images

A recurring theme in Federal Reserve chair Jerome Powell's news conference Wednesday was his confidence that the economy is on sufficiently robust footing that even a sustained campaign of interest rate increases won't shake it.

Why it matters: The Fed is now on track to raise interest rates at the fastest clip in at least 16 years as it tries to contain inflation, a trajectory that will test the capacity of markets and the economy to adjust.

  • Powell is betting that growth is robust enough to withstand both the supply crunches caused by geopolitical events and the tightening by the Fed. He was downright dismissive of talk that there's an elevated risk of recession.

Driving the news: Projections published Wednesday showed Fed officials' median expectation is for the federal funds rate to reach 2.8% by the end of next year.

  • That's higher than it ever reached during the expansion of the 2010s and is above the 2.4% those officials deem the "neutral rate," which neither accelerates nor slows the economy.
  • He also indicated that a plan to reduce the Fed's $9 trillion balance sheet —essentially quantitative easing in reverse — is likely to be implemented at the central bank's May policy meeting.

Said Powell: "In my view, the risk of a recession within the next year is not particularly elevated." He added that "all signs are that this is a strong economy, indeed one that will be able to flourish in the face of less accommodative monetary policy."

  • He even said that the labor market might be "tight to an unhealthy level," given the high ratio of job openings to unemployed workers.

Fed officials think this policy course will bring inflation down, though not abruptly. Their median forecast is for 4.3% inflation this year, but 2.7% in 2023 and 2.3% in 2024, implying they no longer expect the kind of rapid disinflation they envisioned three months ago.

  • That implies the Fed is resigned to a gradual reduction in this inflationary surge, and it's not going to overreact to inflation that's above its target but heading in the right direction (that is, downward).

The bottom line: The Fed is looking to bring inflation down gradually while also maintaining a robust expansion. The open question is whether it's too late for that, and it will take a bigger economic shock to undo the inflationary pressures that have been released.

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