The “keep it there” economy

If Fed Chair Jay Powell had his druthers, not much about the economy would change over the next couple years — except for the level of short-term interest rates.

A common theme during the press conference that followed the central bank’s 50 basis point rate cut was the top US monetary policymaker’s effective cheerleading of current conditions and expressing a desire to keep things this way.

For starters, the opening statement committed Powell to maintenance duty:

We're committed to maintaining our economy's strength by supporting maximum employment and returning inflation to our two percent goal…

This decision reflects our growing confidence that with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate growth and inflation moving sustainably down to 2%...

This recalibration of our policy stance will help maintain the strength of the economy and the labor market…

When asked about the labor market:

The labor market is actually in solid condition. And our intention with our policy move today is to keep it there. You can say that about the whole economy. The US economy is in good shape. It's growing at a solid pace. Inflation is coming down. The labor market is in a strong place. We want to keep it there. That's what we're doing…

There are many, many employment indicators. What do they say? They say this is still a solid labor market. The question isn't the level. The question is that there has been change over particularly over the last few months. And so, what we say is as the risks, the upside risk to inflation have really come down, the downside risks to employment have increased.

And when he was asked about his direct message to the American public: 

The US economy is in a good place, and our decision today is designed to keep it there. More specifically, the economy's growing at a solid pace, inflation is coming down closer to our 2% objective over time, and the labor market is still in solid shape. So our intention is really to maintain the strength that we currently see in the US economy, and we'll do that by returning rates from their high level…to a more normal level over time.

The approach from Powell reminds me of one of my favorite pieces of economics writing from the early-COVID period, when Matt Klein argued that policymakers should aim to provide enough income support for businesses (and, in turn, workers) to “freeze the pre-pandemic structure of the economy in place so that society could quickly return to normal once the health crisis passes.”

The government’s tax and spending powers are, of course, much more powerful than tweaks to short-term interest rates. And the economic and public health ramifications were much more severe back then than any nascent suboptimal trends in the US economy are right now. But the overarching policy prescription is the same: do what’s necessary to blunt any negative momentum and preserve all the positives of this environment.  

“The backdrop is confusing. Steady 3% GDP growth, strong consumer, weak gas prices, inflation that’s 1.2% or 2.6%, depending on who you ask, and an unemployment rate signaling either a) imminent recession or b) a soft-landing return to very comfortable and healthy 2017/2018 levels,” wrote Brent Donnelly, president of Spectra Markets, ahead of the Fed decision. “There has rarely been a greater  disconnect between the message sent by changes and momentum in the  economic data versus the message sent by levels.”