Oct 9, 2019

The world according to Jerome Powell

Photo: Zach Gibson/Getty Images. Illustration: Aïda Amer/Axios

The U.S. economy looks good to Jerome Powell.

The big picture: The Fed chairman laid out his rose-colored vision of the country on Tuesday at the National Association for Business Economics conference. The economy is neither too hot nor too cold, inflation is under control, productivity is increasing, the job market is booming and the Fed is not (repeat, not!) engaging in a new quantitative easing program.

What's happening: It's becoming clear to more economists and market participants that the Fed's toolkit is losing its effectiveness and monetary policy may be powerless to protect the economy if there's a recession. So Powell has deployed a central bank's most consistent weapon: communication.

What he's saying:

1. About the unprecedented level of U.S. debt:

"Households are in good shape. Businesses are borrowing a lot and it’s something we’re monitoring carefully, but again the vulnerabilities are moderate."

2. About the possibility the Fed's loose monetary policy could overheat the economy:

"This just feels very sustainable. There’s no aspect of the economy that is booming. You’ve got a solid consumer sector where wages are going up at the level of productivity plus inflation, job creation is healthy, there’s no one sector like a housing bubble, there’s nothing like that."

3. About growing worry from investors and the business community:

"There are concerns about business investment and manufacturing and trade, of course. We don’t get to see the 11th year of an expansion a lot and there’s a lot to like about it, particularly for people at the lower end of the wage scale who are getting now the highest raises. And it’d be great to continue."

4. About why the Fed is cutting interest rates:

"I look at this as akin to the two instances in the 1990s when the Fed cut and then cut again and cut a third time. ... It provided some support for the economy and the economy took that accommodation onboard and gathered steam again and the expansion continued. That’s the spirit in which we’re doing this."

5. About the Fed injecting around $300 billion of cash to buy U.S. Treasuries in the repo market and plans to continue indefinitely. Isn't that quantitative easing?

"This is not QE. In no sense is this QE. This is nothing like it at all."

6. Fed chairs have typically worried about inflation getting too high, but Powell confirmed on Tuesday that he is instead focused on keeping inflation from getting too low.

"It feels like the problem of this era is to keep inflation from moving down and try to keep it at 2%. We want inflation expectations centered right at 2%, and we really want to hammer that point and make sure that they are because we look around the world and we see disinflationary forces.

The state of play: With consumer confidence falling, leading economic indicators turning negative, the systemically important repo market in disrepair, major European economies likely in recession, the outlook for the trade war deteriorating and stock market volatility popping, Powell is doing his best to infuse confidence into the market.

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