Last week, Federal Reserve Chairman Jerome Powell successfully walked back his October remark that jarred investors, but it’s hardly the last challenge he’ll face to communicating the road ahead.
In what was arguably his biggest test yet as Fed chief, Powell on Wednesday appeared to turn course from his initial stance that the central bank remains “a long way” from a neutral interest rate that would neither rev up nor hold back the economy. His comment, that the Fed Funds rate is near the range of expectations for the neutral rate from other policymakers, helped drive a powerful stock market surge.
However, the path forward doesn’t get any easier — and Powell’s primary challenge will be to avoid the missteps that helped drive a market correction that only reversed course after his speech. The Fed wants to keep normalizing policy, with will do so in the face of worries about an economic slowdown, and increasing pressure from President Donald Trump to keep rates low.
“I think he did a masterful job this past week,” said Joe LaVorgna, chief economist for the Americas at Natixis. “All he had to do was increase the range of plausible outcomes. I thought it was masterfully done, and reflects the economic realities.”
Whether Powell really changed that much was a matter up for hotly contested debate.
After all, the difference between “a long way” from neutral and near the bottom end of a wide range of estimates for that level didn’t seem to be that much — maybe one or two quarter-point rate hikes, at most. The median estimate of neutral, currently around 3 percent, would still equate to at least three more rate hikes.
But the perception that Powell does not hold reflexively hawkish views, and is willing to adapt as the data roll in, seemed enough to convince investors that — at least for now — they don’t have to fear the Fed.
Minutes from the November Federal Open Market Committee meeting further indicated that officials will stress the importance of data.
“In fact, he walked back what he said on Oct. 3,” said Quincy Krosby, chief market strategist at Prudential Financial. “He speaks very clearly, so it is not an issue of the market misunderstanding what he said. He said that.”
Less definitive is what Powell meant when he said interest rates “remain just below the broad range of estimates of the level that would be neutral for the economy