New Fed chair Jerome Powell sees little risk of a recession

  • By Heather Long,
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Jerome H. Powell, the new chairman of the Federal Reserve Board, made his debut public appearance Tuesday, where he told the House Financial Services Committee that he is committed to "clearly explaining" Fed thinking and that the U.S. economy is getting better. He said the recent stock market jitters don't worry him, and he reiterated that the Fed intends to raise interest rates at a slow and steady pace — similar to its moves under his predecessor, Janet L. Yellen.

"My personal outlook for the economy has strengthened since December," Powell said, adding that he has little concern about a recession any time soon. "I don't see [the recession risks] as at all high at the moment."

Assessing the real risk of inflation

Is the economy overheating — or is there a healthy level to maintain?

In December, the Fed predicted the U.S. economy would grow at a 2.5 percent pace this year. Since then, President Trump's tax cuts passed and Congress agreed to raise federal spending by about half a trillion dollars. Powell didn't give a firm growth estimate Tuesday, but he sounded upbeat, noting that the economy grew at "about 3 percent" in the second half of 2017, which is Trump's goal.

Powell has one of the more difficult jobs in Washington right now. He has to keep Wall Street calm, unemployment low and inflation in check — all while facing pressure from Trump. While the Fed is an independent entity over which Trump has no direct control, Powell is a Trump nominee, and the president has made it clear he wants faster economic growth and a booming stock market.

On Tuesday, Republican lawmakers repeatedly tried to get Powell to say the tax cuts are boosting wages, which Powell refused to do. Democrats then tried to get him to say the cuts are adding to the debt and benefit only Wall Street shareholders, which Powell also would not weigh in on. He stressed that the goal of the most sweeping tax legislation in over 30 years is to get businesses to invest more and that it's too early to tell if that's happening.

"The next couple of years look quite strong. I would expect the next two years to be good years for the economy," Powell said. But he hedged that higher wages would only come "over time" if corporations invest more in factories, new equipment and better technology to make workers more productive.

The Fed chair tried to reassure lawmakers that he can walk that line between letting growth pick up after the Trump tax cuts, but not letting the economy get so hot that there's danger of a crash.

The Fed "will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustain basis," Powell said. "Further gradual increases in the federal funds rate will best promote attainment of both of our objectives."

His comments suggest he still thinks the Fed should boost interest rates three times in 2018, although his optimism could perhaps open the door to the possibility of more rate increases. Wall Street traders and economists are overwhelmingly predicting a rate hike at the Fed's next meeting on March 20-21.

By raising interest rates, the Fed looks to cool the economy and ward off inflation, and investors are listening carefully for any signs that Powell intends to pick up the pace of rate hikes.

There's a growing worry that the economy could overheat after the tax cuts and the massive increase in government spending that Congress just approved. Billionaire hedge fund manager Ray Dalio, who had predicted the Great Recession, now sees a 70 percent chance of a recession before the 2020 presidential election.

"Powell erred on the side of caution," said Joseph LaVorgna, chief economist at investment bank Natixis. "It would have been a mistake to hint at four rates hikes this year. If the Fed did four hikes, the yield curve would likely invert, and that would send an ominous sign."

Fears of inflation getting out of control triggered the stock market sell-off earlier this month. The Dow Jones industrial average fell an ominous 666 points on the final day of former Fed chair Yellen's tenure, and it sunk nearly 1,200 points — the biggest single-day point drop in market history — on Powell's first official day on Feb. 5. But it has since regained most of the losses.

Wall Street often tests new Fed chairs with market drops, and Powell, a lawyer and former private equity executive, wants to show he can handle the job that has typically been held by PhD economists. He shrugged off the recent declines as typical market behavior that has little to no effect on the wider economy.

"At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation," Powell said, adding that he likes having clear guideposts for what the Fed wants to see before it raises rates. "Personally, I find these rule prescriptions helpful."

"Powell won't utter the word 'Goldilocks,' but we will," said Greg Valliere, chief global strategist at Horizon Investments, referring to an economy that's not too hot and not too cold.

The president nominated Powell, a Republican with a reputation in Washington as a consensus builder, with the hope that he would keep interest rates low so that economic growth would pick up. Trump's team forecasts 3 percent growth every year for the next decade, a feat few economists believe will happen. But some forecasters do think it's possible growth could hit 3 percent in 2018.

"We think the Fed will raise its 2018 GDP forecast to something close to 3 percent, despite a worrisome spike of consumer debt levels," Valliere predicted.

In December, the Fed projected three rate hikes this year, but 35 percent of economists and traders now predict the Fed will end up doing four (or more) increases this year. Only 24 percent were predicting that Monday, before Powell's testimony.

How to manage inflation

If inflation picks up, it can have an impact on a range of investments.

For now, Powell's biggest problem is that he's starting his job short-staffed. Only three of the seven Fed governor positions are filled, meaning Powell has a smaller team at a time when the Fed needs to be watching many areas in the markets and the economy.

Trump nominated one other person — economist Marvin Goodfriend — to serve as a Fed governor, but the Senate is on the fence about confirming him. All the Democrats on the Senate Banking Committee voted against Goodfriend after he had a rocky confirmation hearing. Goodfriend struggled to defend his view that inflation would get out of control after the Fed put rates at a historic low during the Great Recession. That scenario never happened. U.S. inflation is still well below target a decade after the crisis. Goodfriend also said he doesn't think the government should guarantee 30-year mortgages, a view that startled several lawmakers, because it has been a key part of helping the middle class buy homes.

In addition to Democrats, Sen. Rand Paul (R-Ky.) has also said he will vote against Goodfriend. One more "no" from a Republican senator would doom the nominee.

The Fed still lacks a vice chair, as well, because Trump has yet to nominate anyone.

"I am eager to have more colleagues," Powell told lawmakers.

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