Wednesday’s meeting of the Federal Open Market Committee marked Jerome Powell’s first in his new role as Federal Reserve Chair. As expected, the Committee used the meeting to raise its target for the federal funds rate by another quarter percentage point, reflecting its members’ desire to bring interest rates back up to more normal levels as well as their confidence that the ongoing economic expansion remains strong enough to justify those higher rates. And, just as Berenberg Capital chief economist Mickey Levy predicted before the meeting, FOMC members also upgraded noticeably their forecasts, calling for more rapid economic growth and lower unemployment this year and next, while reaffirming their expectation that inflation will soon return to its long-run two percent target.
At the press conference that followed the FOMC meeting, several reporters asked Chair Powell to comment in detail on the factors behind the improving economic outlook and to identify some of the risks that might unexpectedly derail the expansion. These questions, as well as Chair Powell’s answers to them, proved most insightful. They highlight that today, as always, America draws great strength from its free market economy. The government “helps” most when it interferes as little as possible with the free market and with free trade.
Much of the discussion at the post-meeting press conference focused on recent changes to the federal tax system, especially those that lowered corporate tax rates and provide stronger incentives for new business investment. Though not a PhD economist, Chair Powell spoke exactly like one, noting in the simplest and clearest of terms that “if you make investment more attractive, companies should do more of it.” Chair Powell went on to summarize the FOMC’s consensus that, in the short run, these tax changes will almost surely lead to faster rates of growth through their positive effects on aggregate demand. In the long run, this same increase in investment expands the capital stock, enhancing workers’ productivity and leading to sustained gains in wages. Once again, Chair Powell noted quite rightly that while the magnitude of these long-term gains is highly uncertain, there can be no doubt that at least some of these positive supply-side effects will help the economy, too.
Finally, on the issue of capital investment, Chair Powell echoed his predecessor Janet Yellen’s view that while “it’s very important that we have a focus on productivity” in the United States today, “it’s not something that we can really do at the Fed.” He’s absolutely correct on that point as well. It’s up to Congress and the President to design tax policies that balance the budget but also leave intact the free market’s strongest incentives for investment and innovation – the critical forces driving the economy’s long run growth.
In identifying potential risks to the FOMC’s positive outlook, Chair Powell mentioned that, at their meeting, several Committee members “reported in, about their conversations with business leaders around the country and reported that trade policy has become a concern going forward for that group.” Indeed, following sharp declines in the stock market last week, damaging effects of tariffs and trade restrictions appear to have become a major worry for many investors as well.
The stock market is often volatile, however, and it is far too soon for any of us to panic. Importantly, the Trump Administration may simply be using harsh rhetoric as a bargaining strategy to induce other countries to adopt freer, fairer trade policies themselves. On the other hand, the fact remains that while tariffs may benefit selected industries by protecting them from foreign competition, they simultaneously penalize all others that use imported materials to produce American goods with American capital and labor.
On these points, Chair Powell emphasized, “we don’t do trade policy here at the Fed.” And especially given the fluidity of the situation, he understandably declined “to comment on any particular situation with any particular country.” Nevertheless, the lessons to be gleaned from his first press conference as Federal Reserve Chair are consistent and clear. The United States economy performs best when the government interferes least, allowing the free market to operate most efficiently. It would be a shame if policymakers outside the Fed were to ignore those lessons and let missteps on international trade undo the very real and significant gains that have already started to accrue through better tax and regulatory policies.
Peter Ireland is a professor of economics at Boston College and a member of the Shadow Open Market Committee.
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