The Fed Has Enough Room to Combat the Next Crisis
Despite what some say, the central bank has the ammunition to cushion the economy from negative shocks if needed.
Fed Chairman Jerome Powell may confront an economic crisis soon.
Photographer: Andrew Harrer/Bloomberg
The big news from Federal Reserve Chairman Jerome Powell last week was not so much that he still sees the need for further interest-rate increases despite signs of trouble in the global economy. Rather, the surprise was that he doesn’t believe the U.S. economy is poised to overheat. The takeaway for markets is that there is no impediment to the Fed shifting to a more dovish stance should the economy stumble.
A nimble Fed not tied down by immediate inflationary concerns greatly reduces the risk that trade wars or other shocks will send the economy into recession. Central bankers don’t need the room to reverse a recession. They just need the room to prevent one. Within this monetary policy framework, the relatively benign response of markets to rising external risks is understandable.