Powell’s Bet: The Data Is Right, the Market Is Wrong
Although the Fed chairman didn’t train as an economist, he approaches the job the same way as his economist predecessors
The data says the economy is doing great; the markets say it could be headed for a recession.
The Federal Reserve’s decision to raise interest rates and signal more coming, albeit fewer than before, shows Chairman Jerome Powell cares much more about the data.
In doing so, Mr. Powell has shown that though he didn’t train as an economist, he approaches the job the same way as his economist predecessors— by assembling a picture of the economy and its outlook from data, anecdotes and economic models. The markets are an input to this process, but the market’s forecast itself carries no particular weight.
Based on the data alone, Mr. Powell’s choice was an easy one. Growth and unemployment have unfolded exactly as the Fed expected, and some weaker indicators such as housing and jobless claims have improved of late.
Yes, growth will slow next year, but the Fed expects and needs that. Otherwise, unemployment will drop close to 3% or lower, from its current 3.7%—already well into overheating territory. In any previous era, today’s inflation-adjusted interest rate of just above zero would be considered downright reckless with unemployment so low.
As Mr. Powell noted, when the economy follows the Fed’s projections, so should interest rates.
The main arguments for the Fed to stop raising rates are that global growth has stumbled, inflation is still just below its 2% target, and the declining stock market and flattening yield curve (when long-term bond yields drop close to short-term yields) are signaling a sharper slowdown than economists expect.
Mr. Powell acknowledged all these worries: They are why Fed officials scaled back their projections of economic growth and rate increases for next year. He described the decline in stocks and rise in corporate bond yields as a tightening of financial conditions that needs to be accommodated with slightly less monetary policy tightening.
But he didn’t see markets as telling him something the data and anecdotes had missed: “From a macroeconomic standpoint, no one market is the single dominant indicator.”
Mr. Powell could have positioned the Fed for the possibility the markets are right and the data are about to take a turn for the worse with a much more ambivalent statement about future rate increases.
The fact he didn’t is risky—for the economy and him, personally, since President Trump will likely hold him responsible for a recession. Markets and economic data frequently diverge; the stock market has predicted nine of the last five recessions, the old joke goes. But that is actually a pretty good record; the Fed hasn’t predicted any of them.
Write to Greg Ip at greg.ip@wsj.com