“It’s very hard to say with precise certainty the way this is going to unfold,” Powell told reporters this week. “…No one knows whether this process will lead to a recession or, if so, how significant that recession would be.”
Public confessions of doubt are rare in official Washington. But they have become commonplace for Powell, 69, whose candor reflects the uncertainties shrouding the global economy as well as a revolution in Fed communications since the days when then-chairman Alan Greenspan cultivated an image of singular economic mastery.
But Powell’s latest remarks come as the Fed’s anti-inflation fight is making only slow progress, leaving the institution and its boss vulnerable to criticism over the cost to workers and businesses of continued rate hikes.
On Friday, the Dow Jones industrial average fell for the fourth straight day, sinking below 30,000 for the first time since June and wiping out everything investors had gained since November 2020.
“People look to the Fed as the best source on where we’re going. The Fed has information. They have a highly-trained staff. They have no political reason to hide the ball,” said Claudia Sahm, who spent 12 years as a Fed economist. “Everyone wants to know where we’ll be next year … But really the Fed is just as blind as the rest of us.”
After wrongly predicting for most of last year that inflation would prove “transitory,” Powell has emphasized the complexities involved in righting the $25 trillion U.S. economy as it is buffeted by an unusual mix of forces.
Indeed, no one has seen an economy like the current one. Snarled supply chains. Soaring global food and fuel prices, triggered by Russia’s invasion of Ukraine. Rolling factory shutdowns in China resulting from an unpredictable pandemic.
The cumulative impact has repeatedly surprised Fed prognosticators, Wall Street analysts, White House officials and corporate executives. Current inflation readings are “not where we expected or wanted to be,” Powell conceded this week.
Even with the additional, planned rate hikes, the Fed does not expect annual inflation to return to its 2-percent price-stability target before late 2025.
“You have to make your best guess with limited data and limited understanding,” said Marc Chandler, managing director for Bannockburn Global Forex. “The Fed recognizes, not only that it’s been so wrong, but that there’s no playbook. How do you play these multiple shocks?”
Profound uncertainty is not causing the Fed to go slow.
Powell’s comments to reporters on Wednesday came as he unveiled the central bank’s fifth interest rate increase this year, all designed to slow the economy and ease pressure on prices. Since March, the Fed has lifted its benchmark lending rate by a full 3 percentage points, the fastest increase of that size since 1982.
The Fed chief said rates will likely rise by an additional point-and-a-quarter before year end. Some economists think the central bank should pause to evaluate the impact of its earlier efforts to slow the economy before implementing further increases. But Powell’s bet is that the costs involved in losing control of inflation outweigh the dangers of pushing the economy into a recession.
To dispel some of the analytical fog, the Fed this week also released its top officials’ quarterly economic forecasts.
Wall Street analysts pore over the figures, which represent the most authoritative guide to the assumptions guiding monetary policy.
Yet, Powell suggested…
Read More: Federal Reserve unsure of economy’s direction as Wall Street meltdown worsens
