‘Economy Is Strong,’ Fed Chairman Says, Urging a Policy of Risk Management

JACKSON HOLE, Wyo. — The economy is right about where the Federal Reserve wants it, running neither too hot nor too cold, Jerome H. Powell, the Fed chairman, said in a speech Friday as he argued for caution and risk management.

Powell’s comments, at an annual gathering of leading economists and central bankers in the Grand Tetons, indicate that the Fed’s strategy of moving slowly in raising interest rates is likely to stay in place. He argued for remaining open-minded about just how low unemployment can go or where rates might end up, suggesting the Fed would be guided by data rather than by assumptions.

“The economy is strong,” Powell said, according to prepared text of his remarks. “Inflation is near our 2 percent objective, and most people who want a job are finding one.”

He specifically rejected the fear that inflation might be accelerating beyond the level the Fed seeks, which suggests no abrupt rate increases are on the way. “While inflation has recently moved up near 2 percent, we have seen no clear sign of an acceleration above 2 percent, and there does not seem to be an elevated risk of overheating.”

His remarks came as the Fed, which has raised interest rates twice so far in 2018, weighs whether to do so one or two more times this year and how much to raise interest rates in 2019 in an economy growing at a steady clip and with an unemployment rate hovering near its lowest level in two decades.

President Donald Trump has assailed Powell and the Fed for raising rates; Powell made no reference to the president’s comments in his speech.

In arguing for a risk management approach, Powell invoked a principle attributed to economist William Brainard, saying, “When you are uncertain about the effects of your actions, you should move conservatively,” much like starting a patient on a small dose of medicine to judge the reaction.

In the current context, that implies the Fed should move in small steps and constantly re-evaluate its plans in light of the latest data. Powell added that a more aggressive strategy would be warranted in the event of a financial crisis or if the Fed’s credibility as an inflation-fighter were to come into doubt.

The Fed, he argued, must learn from one of its past failures — allowing high inflation to take off in the 1970s — and a past success, of allowing the boom of the late 1990s to take hold rather than cutting it off out of misguided fear of inflation.

One of the Fed’s central errors of the 1970s, he argued, was excessive confidence in estimates of the so-called natural rate of unemployment, the level to which joblessness can fall without sparking inflation. That mistake helped fuel double-digit inflation by the end of that decade.

By contrast, in the mid-1990s Chairman Alan Greenspan suspected that the economy’s productive capacity was rising rapidly, and so he resisted calls from his colleagues to raise interest rates to prevent overheating and inflation.

“Under Chairman Greenspan’s leadership,” Powell said, the Fed “converged on a risk-management strategy that can be distilled into a simple request: Let’s wait one more meeting; if there are clearer signs of inflation, we will commence tightening.”

Inflation fell rather than rose, and the Fed’s caution enabled a boom that drove wages up and unemployment down.

There was a small hint that Powell was thinking about the possibility that history might repeat. “It is difficult to say,” he said, “when or whether the economy will break out of its low-productivity mode of the past decade or more, as it must if incomes are to rise more meaningfully over time.”

Powell turned to a nautical pun to explain the challenges of setting monetary policy. When economists refer to the natural rate of unemployment, they use the term “u*,” pronounced U-star, and call the natural interest rate r*, or R-star.

But these natural rates are the Fed’s best estimates, and must be inferred from things that the Fed can measure more directly, like wage growth and inflation.

“Navigating by the stars can sound straightforward,” Powell said. “Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly.”