Economists warn of Fed Policy risks as Jerome Powell prepares to speak

Powell Speaks: US Fed Chief Jerome Powell is about to speak at the National Association for Business Economics on Monday. A recent survey reveals growing concerns among economists that the US central bank may commit a policy misstep that threatens economic stability.

The association polled 32 professional forecasters and found that 39 percent identified a "monetary policy mistake" as the biggest risk facing the US economy over the next year. That topped other worries, including the outcome of the presidential election on November 5 and the conflicts in Ukraine and the Middle East, where each accounted for a count among 23 per cent of the respondents.

The Fed will continue grappling with the decision of how to balance further interest rate cuts with increasing inflation: interest rates cut 200 basis points since June have soothed inflation, which has moderated from over 7 per cent at the beginning of 2022 to 2.2 per cent in August. Powell will speak about the Fed's decision in late August to lower its benchmark interest rate by half a percentage point when he speaks in Nashville, Tennessee, 12:55 p.m.

Many economists believe the Fed will cut rates again at its Nov 6-7 policy meeting, perhaps another quarter point or half of a percentage point. Despite expectations that the economy is going to slow down -2.6 per cent this year to 1.8 per cent next year-the panel does not expect a recession until at least 2026.

The panel believes there is a "soft landing" for the economy, but people still tend to debate the approach of the Fed. Most participants feel that the policies of the central bank are misaligned because 65 percent have said the latest rate cuts are coming "just in time." But just one-third of participants thought that the current policy rate was appropriate. Others thought it should be lower or higher.

Political risk ratings show divided opinions regarding whether the sweep of an election by either party would help or hurt stability in the economy. The survey underlines the fact that running fiscal policies in an evolving and perpetually shifting political environment replicates the overarching concerns about the Fed's ability to guide the economy effectively in the next year.