Powell Claims No "Elevated" Risk for US Recession, NY Fed Models Disagree
Today Jerome Powell got out of the beltway and enjoyed some southern hospitality at Mississippi Valley State University, speaking at the Hope Enterprise Corporation Rural Policy Forum.
Most of the Fed Chairman’s talk was dedicated to talking about how the Fed could the financial needs of rural areas, a questionable claim considering the direct role central banks have played in increasing wealth inequality. He did, however, provide some additional thoughts on the strength of the US economy as a whole.
In particular, when asked about future risk, he said he did not “feel that the probability of recession is at all elevated.”
What’s interesting is that this claim does not follow the models published by the NY Federal Reserve which shows the current risk of recession at the highest they’ve been since 2008.
(H/T @TexarkanaFed via Twitter)
Of course, given the poor track record of Federal Reserve models, perhaps more useful is that this rosy view of the US economy seems to contradict the recent policy trends from the Powell Fed.
This includes changes to recent FOMC statements and projections about the rate of future rate increases, as well as indicating a willingness to stall the slow normalization of the Fed’s balance sheet that is currently in process. As he said in late January:
We’re listening carefully with – sensitivity to the message that the markets are sending and we’ll be taking those downside risks into account as we make policy going forward...If we came to view that the balance sheet normalization or any other aspect of the normalization was part of the problem, we wouldn’t hesitate to make a change.
Though the statement was made in carefully managed “Fed Speak”, the message it communicated couldn’t have been more clear – particularly since Powell has long been an inner Fed voice concerned about the size of the Fed’s balance sheet. The market understood that Trump finally got the Dovish Federal Reserve that he has spent the last year campaigning for. The day of the announcement was the first in Powell's tenure that the market reacted positively to one of his rate-setting announcements.
Unfortunately for Powell, none of the arguments for “normalizing” monetary policy has changed since Powell first outlined his desires for a slow and gradual wind down. The economic data that the Fed claims to make its decisions off of continue to look strong and the dangers of facing a crisis with the monetary interventionists tools they desire have not gone away. So what has changed? Maybe, just maybe, it’s the perceived risk of a future recession that the Fed’s models, other signals, and a growing legion of economists are projecting.
Of course, in the Chairman’s defense, it would be a mistake to see the Fed’s top role as one of truth teller. The Fed’s job is necessarily a political one, to project an air of confidence and try to maintain confidence in the system. Unfortunately, hot air only goes so far, as Bernanke learned in 2007.