Powell Can’t Let Markets See Him Sweat

The reason is that those rate projections, which appear as dots on charts of the Fed’s quarterly projections, aren’t just a forecast but a signaling device. Right now, the Fed is determined not to signal premature confidence.

The economy stands at an unusual inflection point. Based on vaccines, stimulus and pent-up demand, there is every reason to believe growth this year could be the best in decades. That is clearly what investors now assume, judging by rising stock prices and bond yields.

And yet precious little data on hand actually substantiates this: Vaccinations have yet to turn the tide of the pandemic, and despite one strong jobs report, employment is still more than nine million short of its pre-pandemic level.

There is no upside to the Fed revising its rate forecast now and lots of downside. It could fuel suspicions among bond investors that it doesn’t intend to stick to its plan of keeping rates near zero until inflation is clearly headed above 2% and full employment has returned. Such suspicions could push market rates higher and make the boom less likely and the Fed’s job harder.

Some Fed officials clearly see the case for earlier liftoff: four of 18 see rates rising by the end of 2022, and three more by the end of 2023. Asked about that at Wednesday’s press conference, Fed Chairman Jerome Powell responded by noting that the majority of officials still don’t see liftoff until 2024 or later: “Part of that is wanting to see actual data rather than just a forecast at this point.”

The unusually high level of uncertainty is weighing on officials, he noted: “We haven’t come out of the pandemic before. We haven’t had this kind of fiscal support before.”

That suggests if incoming data over the remainder of the year are as upbeat as investors and many economists expect, uncertainty should recede and officials may feel confident enough to revise their rate expectations. The dots, Mr. Powell explained, show “how we think about the future,” they don’t “pin down a time when we might or might not lift off.”

Mr. Powell’s situation bears some similarities to that of leading government infectious-disease expert Anthony Fauci. Both are technocrats rooted in hard data and science who are also mindful of how the public responds to what they say about that data and science. Just as Dr. Fauci doesn’t want the public to abandon protective behavior in response to declining Covid-19 cases, Mr. Powell doesn’t want the markets to overreact to good news on the economy.

“I’d hate to see us take our eye off the ball before we actually finish the job,” Mr. Powell said Wednesday. He was talking about health officials’ efforts to suppress the pandemic, but he could have been talking about the Fed’s efforts to revive the economy.

Write to Greg Ip at [email protected]