Will Powell's "Greenspan moment" come when US economic data exceeds expectations?
The recent macroeconomic data in the United States has been positive, but in this context, labor market growth has also performed well, and inflation
is decreasing. However, former Federal Reserve economist Claudia Sahm wrote that this scene is familiar with the economic situation of the mid-1990s,
and then Federal Reserve Chairman Greenspan wisely chose to pause interest rate hikes in the face of such above trend economic growth. Now, Powell
also faces a choice.
Powell said in his speech at the New York Economic Club last week that the US economic situation is improving, which may be his most optimistic
statement in over two years. Analysis shows that the interest rate hike plan for November has been put on hold and may continue to be suspended
Economic growth is one of the warning signs for the Federal Reserve, and Powell expressed concerns last week. "To sustainably return to the 2%
inflation target, it may take a period of below-trend economic growth and further weakening of labor market conditions," he said
Powell also stated, "We are concerned about recent data showing resilience in both economic growth and labor demand. If there is more evidence
that economic growth continues to be above trend levels, or that labor market tensions are no longer easing, this may lead to an increase in the risk
of worsening inflation and further tightening of monetary policy
In addition to Powell, other Federal Reserve officials also frequently expressed concerns about "too good economic growth". At the September interest
rate meeting, the Federal Reserve raised its forecast for US GDP growth this year and lowered its forecast for next year. Better than expected economic
data strengthened the Fed's strategy of maintaining high interest rates for a longer period of time.
Sahm said that theoretically, both the Phillips curve and Taylor's law support the Fed's current operations. When economic growth exceeds trend levels,
it indicates that strong demand cannot be sustained. Assuming continuous supply exceeds demand, it will push up inflation, which will make
combating inflation more complex.
She believes that the danger of the Federal Reserve raising interest rates while economic growth is above trend is that the current "trend" is not yet
clear, which is potential GDP growth. If the 'trend' is higher than the Federal Reserve's estimate, then the Federal Reserve may react to high GDP growth
by raising interest rates too much, overreacting. Especially with the current chaotic economic situation in the United States, it is difficult to say what
the "trend" is.
From a historical perspective, the recovery period after the 2008 financial crisis and the second half of the 1990s are two comparable periods, as the
trend growth understood by the market during these two periods is both rapid and drastic.
In 2013, after the end of the financial crisis, the Congressional Budget Office released estimates that the average annual potential GDP growth rate in
the United States from 2012 to 2019 was 2.1%. By 2019, the potential GDP growth for the same period had become 1.6%, a significant decline from the
2013 forecast, which means that it would take approximately 45 years, rather than 34 years, to double the actual GDP. This change only occurred
within six years.