Speaking to the Federal Reserve’s Board of Governors on Wednesday, Fed Chair Jerome Powell urged the economists not to make predictions about the future of the US economy based on past economic patterns, claiming the US was in essentially new economic territory after the COVID-19 pandemic.
“Regular forecasting also demands a systematic approach and a high degree of intellectual rigor,” Powell said, urging that this “has to be combined with flexibility and agility.”
“Economic models can do a reasonably good job of capturing the working of the economy over past decades,” Powell said. “Of course, even with state-of-the-art models and even in relatively calm times, the economy frequently surprises us.”
“But our economy is flexible and dynamic, and subject at times to unpredictable shocks, such as a global financial crisis or a pandemic,” he continued. “At those times, forecasters have to think outside the models.”
At its most recent meeting last week, the central bank’s Federal Open Market Committee (FOMC) decided to leave interest rates at the same record-high level they have been at for four months, despite a creeping rise in inflation.
While Powell acknowledged at the time that the Fed’s high interest rates were exerting a “downward pressure on economic activity” that had yet to be fully felt, he also noted that “recent indicators suggest that economic activity has been expanding at a strong pace, and well above earlier expectations.”
Ever since the Fed began hiking interest rates in response to record-high inflation in early 2022, economists, bankers, and investors alike have been anticipating a recession and a rise in unemployment - phenomena that have yet to manifest themselves, despite being common effects of raising interest rates. Even Powell long doubted the Fed could manage a “soft landing.” While the Fed remained optimistic in the short term, its predictions for the year 2024 and 2025 were similarly dim.
Still, the number of new jobs created each month has continued to decrease and the number of unemployed persons has continued to slowly increase, and investors remain mostly unconvinced by the Fed’s rosier predictions as of late, with the infamous “inverted yield curve” continuing to signal that a recession is expected.