Fed chair Jerome Powell shows some optimism on economy after rate pause
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Federal Reserve chair Jerome Powell. Photo: Zach Gibson/Getty Images. Illustration: Aïda Amer/Axios
Fed chair Jerome Powell believes the U.S. economy is capable of growing faster than usual right now, without inflationary pressure.
The big picture: That was the subtext — and, in some spots, explicit text — of his comments after Wednesday's decision. It is also fueling a surge in stock and bond markets over the last 24 hours.
Why it matters: If the economy's potential is rising unusually quickly right now because of supply-side improvements, it allows the Fed more room to let growth run and less of a need to trigger a slowdown to bring inflation in line.
State of play: The labor force has grown markedly in the last year, due to more people seeking work and higher immigration rates, and is functioning better than it did amid post-pandemic dysfunction. Supply chains have righted themselves.
- All of that means that the supply side of the economy — America's economic potential — may be rising faster than the sub-2% rate most economists believe to be plausible in the long run, given demographic trends.
- Powell explicitly raised that possibility and cited those factors in his news conference.
What they're saying: He noted "supply-side improvements like shortages and bottlenecks and that kind of thing going away," and "a significant increase in the size of the labor market now, both from labor-force participation and from immigration."
- He said that's "part of why GDP is so high, is because we're getting that supply. So we welcome that."
- Powell added that the situation appears to be that "potential growth is elevated for a year or two right now over its trend level."
Between the lines: That helps explain why the Fed has not overreacted to super-fast growth over the summer, including Q3's sizzling 4.9% annualized GDP.
- To the degree strong growth reflects improvement in the supply side of the economy, it is something the Fed can embrace and not fight through more tightening.
Of note: New data Thursday morning showed a blockbuster 4.7% gain in labor productivity last quarter. It is the biggest rise in output per hour worked in three years.
- Productivity numbers are famously volatile and hard to interpret in the short run. But Q3's showing is consistent with an intriguing theory.
- There was massive hiring in 2021 and 2022, which meant much of the workforce was new on the job; 2022 productivity numbers were terrible. Perhaps those new workers just needed time to get fully trained and reach their productive potential.
The bottom line: That narrative is more of a theory than a proven fact. But if true, it would support Powell's musings about supply-side improvement in the economy.
