Fed’s Powell Set to Speak Amid Concerns Over Policy Mistakes and Election Risks, Report Says

By Howard Schneider

NASHVILLE, Tennessee – A potential misstep by the U.S. central bank in managing interest rates during the final phase of its battle against inflation is seen as the primary risk that could undermine the economy over the coming year, according to a recent survey of economists.

In a poll of 32 professional forecasters conducted by the National Association for Business Economics, 39% identified a "monetary policy mistake" as the greatest downside risk to the U.S. economy in the next 12 months. In comparison, 23% pointed to the outcome of the upcoming U.S. presidential election on November 5, while the same percentage considered the escalation of conflicts in Ukraine and the Middle East as the most significant threats.

The survey results, released on Sunday, underscore the close attention economists are paying to the Federal Reserve as it navigates the complexities of easing monetary policy. The Fed aims to bring inflation down steadily to its 2% target while preventing a substantial rise in the unemployment rate, which has been gradually increasing over the past year.

Federal Reserve Chair Jerome Powell is scheduled to address the association at 12:55 p.m. CDT in Nashville, where he is expected to provide insights on the recent decision to cut the benchmark interest rate by half a percentage point during the Fed’s recent meeting and outline the considerations for upcoming rate adjustments planned for the remainder of this year and into 2025.

Analysts anticipate another rate cut, potentially by a quarter or half a percentage point, during the upcoming policy meeting on November 6-7.

Overall risks to the economy continue to rise, with 55% of economists indicating that a worse-than-expected performance is more likely than a better outcome, with Fed policy at the forefront of potential challenges.

Currently, the economists foresee U.S. economic growth slowing to 1.8% next year, down from an estimated 2.6% for this year. They predict the unemployment rate will rise to 4.4%, up from the current 4.2%, while inflation is expected to conclude next year at 2.1%. Notably, two-thirds of the respondents do not foresee a recession occurring until at least 2026.

Such projections would likely be welcomed by Powell and the Fed as indications of a successful "soft landing." Inflation, measured by the Fed’s favored personal consumption expenditures price index, has decreased from over 7% in 2022 to 2.2% last month, all without triggering a recession or a significant rise in unemployment. Despite an increase in the jobless rate from last year’s historical low of 3.4%, it remains considerably below the average of 5.7% recorded since the late 1940s.

However, there is considerable debate on how to conclude the current monetary policy effectively, highlighting concerns about the Fed’s ability to strike a balance—avoiding overly tight financial conditions that could slow the economy unnecessarily or loosening too quickly, which might spark inflationary pressures anew.

While the median of the forecasting panel believes the current policy rate is appropriate following the recent cut, opinions are divided. Approximately 65% of respondents indicated the rate move was "just in time," but only one-third believe the prevailing policy rate is "just right." Another third suggest it should be below 4.75%, while 30% feel it should be 5% or higher.

Respondents also expressed divided views about which electoral outcome presents the greater threat to the economy. While unified control of Congress and the presidency can facilitate smoother decision-making on critical financial issues, it may also grant more discretion to a president in realizing campaign promises, including tax cuts or adjustments to trade policies.

Thirteen percent of respondents viewed a complete Republican sweep of the executive and legislative branches as a threat, compared to 10% who felt the same about a Democratic sweep. Conversely, 7% considered either party’s domination as potentially beneficial.

The concept of divided government was perceived as a downside risk by 17% and an upside risk by 13% of those surveyed.