Fed’s Powell warns forecasts must be flexible amid ‘dynamic’ economy

Federal Reserve Chair Jerome Powell urged the central bank’s forecasters Wednesday to remain flexible and “think outside” traditional economic models as they continue to offer projections for a post-pandemic economy that has repeatedly confounded expectations.

Powell touted the Division of Research and Statistics, which provides the Fed with economic data and analysis ahead of its interest rate decisions, at a conference celebrating the division’s 100th anniversary.

While the Fed chair noted that the division’s forecasts require “a high degree of intellectual rigor,” he also emphasized that this “has to be combined with flexibility and agility.”

“Economic models can do a reasonably good job of capturing the working of the economy over past decades,” Powell said at Wednesday’s conference. “Of course, even with state-of-the-art models and even in relatively calm times, the economy frequently surprises us.” 

“But our economy is flexible and dynamic, and subject at times to unpredictable shocks, such as a global financial crisis or a pandemic,” he continued. “At those times, forecasters have to think outside the models.”

Powell did not mention the outlook for the economy or potential changes to interest rates Wednesday.

The Fed opted to hold interest rates steady at a range of 5.25 percent to 5.5 percent last week, marking the first time in nearly two years that it has paused rates at two consecutive meetings. 

The central bank has repeatedly raised interest rates over the past year-and-a-half in an effort to ease inflation. However, the economy has remained surprisingly resilient, and inflation still sits well above the Fed’s 2 percent target.

The labor market, though, may be showing signs of cooling.

The October jobs report released last week fell short of expectations; the U.S. economy added 150,000 jobs, and the unemployment rate rose to 3.9 percent.

Updated at 2:08 p.m.