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Powell Sounds Like Someone Who Saw Much of His Recession Risk Drop Away Last Week

Published on September 30, 2024

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Peter Williams

Powell Sounds Like Someone Who Saw Much of His Recession Risk Drop Away Last Week

Chair Powell’s remarks today struck a notably more optimistic tone in his remarks than he had during the post-meeting press conference a few weeks ago.
- “Overall, the economy is in solid shape; we intend to use our tools to keep it there.”
Despite noting that the labor market has “cooled,” Powell’s description of it was fundamentally solid and skewed towards the more optimistic, and hysteresis-linked, data points.
Rather than a more traditional dovishness, Powell’s has always struck me as more of a supply-side dovishness. This is largely driven by his experience during the 2015-19 period at the Fed, that sustained cyclical outcomes can create positive hysteresis in the labor market with improved supply outcomes and, with somewhat less confidence, greater investment and productivity as well, in addition to positive social ones.
The “hawkishness” that was present in his comments had much less to do with the his reaction function, which remains structurally dovish, and much more to do with the very positive surprises that the national accounts revisions contained last week (see more here).
First, he noted that GDI tended to be more cyclical and leads GDP. It had been much weaker and was serving as a notable drag on the Fed’s activity forecasts but was revised up to above the old level of GDP (also revised higher by a small amount) fully ameliorating these concerns.
- “For the last year and a half or so GDI has been quite low relative to GDP…. That’s been a downside risk that we’ve been monitoring… There’s now no gap between the two. That removes a downside risk to the economy.”
Second, Powell seemed to put a fair amount of weight on the possibility that the falling savings rate signaled a potential looming deteriorating in consumer spending patterns which could accelerate labor market weakness. That downside risk was also revised away.
- “We see DPI [disposable personal income] being estimated up, removing what we’d been thinking of as a possible risk to the economy… It speaks to a background that spending can continue at a health level.”
Of course, this macro optimism informs a policy baseline which still assumes a notable easing path and which is, as stated, symmetric between the two sides of the mandate but in reality much more likely to respond to any (modest) downside surprises in the employment mandate than equivalent inflationary upsides. Despite the stated emphasis on increased symmetry in the mandate, with inflation relatively more contained than it was, the Fed is increasingly returning towards a more FAIT-like asymmetric reaction function, although one with (indeterminately) higher potential growth and neutral interest rates than pre-covid.
The benchmark revisions also highlight that estimate of trend productivity growth, and thus, at least, medium-term potential growth likely higher than before.
Despite seemingly pulling the rest of the Committee to start off with a 50bps cut, Powell suggested little sense of acute urgency in the future baseline rate path given the improved cyclical backdrop.
- “Our decision to reduce our policy rate by 50 basis points reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2 percent.”
- “This is not a committee that feels like it’s a hurry to cut rates quickly. It’s a committee that wants to be guided by the incoming data.”
- “From a base case standpoint, we’re looking at it as a process that’ll take place over some time.”
It was more subtle but embedded in Powell’s description of the outlook and reaction function seemed to be a view that barring a more notable downside shock he thinks that natural glidepath of the fed funds rate is to somewhat a bit above, rather than all the way to, neutral.
There was not much notable discussion of the possible economic impacts of Hurricane Helene with Powell’s remarks on the disaster and recovery more focused on the initial sustainability of the banking and payments system in the affected area.

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