Powell Aims for Soft Landing

Powell Aims for Soft Landing That Eluded Seasoned Fed Chiefs

Federal Reserve Chairman Jerome Powell is trying to pull off an unparalleled soft landing of a U.S. economy.  At the same time, he wants to maintain a rock-bottom unemployment rate.

Powell delivered his second round of semi-annual testimony to Congress on Thursday.  He told lawmakers that the next two years will be “good” ones for the economy. If he’s right, he’ll be at the controls when the current U.S. expansion becomes the longest on record.

It’s what comes afterward that has some investors worried.  The concern that Powell could end up crashing the U.S. into a recession as it jacks up interest rates.  They believe that  higher interest rates are necessary to prevent the labor market and the economy from overheating.

“If we were to roll the camera forward to two years from now, the Fed “will have a problem getting it right.”

In his appearance this week before the House Financial Services Committee, Powell opened the door to the Fed raising rates four times this year.  This is because he acknowledged stronger economic growth may prompt policy makers to rethink their plan for three hikes.  Stocks have fallen in the two days since his testimony and futures early Thursday pointed to further declines. The yield on the 10-year Treasury note has reached 2.83 percent.  This is four basis points lower than it was before Powell’s testimony was released on Tuesday.

Zandi said he can’t remember a time when the Fed achieved what Powell is trying to do now.  “It’s very hard to soft land an economy once you’re below full employment.” “It’s like landing in the fog on an aircraft carrier that’s in the middle of choppy seas.”

It’s tough because the central bank is trying to slow economic growth enough to edge up unemployment.  At the same time, they do not want to trigger a contraction in gross domestic product. “It’s going to take some real good policy making and some luck to avoid a recession in 2020.”  This would coincide with the next presidential election.

New York Fed President sees a “real risk” of economic overheating over the next few years.  “W have an economy that is growing at an above-trend pace.  This is at a time when the labor market is already quite tight.  Furthermore, the economy will be getting an extra boost in 2018 and 2019 from the recently enacted tax legislation.”

Read more.