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Powell’s risk profile may be all wrong for Fed’s future challenges

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What if the warnings for Jerome Powell are all wrong?

Powell, a Fed governor since 2012 and now chosen by Trump, is mostly seen as keeping the central bank on its current trajectory: a few interest-rate increases next year and a couple more sometime after that, with the benchmark rate peaking at about 2.8%. That trajectory might be tested, and not in the way commonly thought. Assumptions can always do with having their tires kicked.

The Federal Open Market Committee has been on its trajectory for a year with only a few nips and tucks to forecasts along the way. While those assumptions have been little changed, quite a lot outside the Fed has changed. Not just in the U.S. economy, but for the world as a whole. The economic picture for both has strengthened, and the steadiness of Fed forecasts masks this shift.

It's fair to say that the next Fed chair might well have to manage the next recession, given that sometime during Powell's four-year term the current expansion would become the longest ever. It has to end sometime. That and the continued failure of inflation to behave as it should have long been seen as the biggest potential challenge.

More recently, a new risk has kind of crept up on us. And it's a good problem to have. This week's FOMC statement, widely seen as a bit of cut-and-paste job, contained a clue. In the first paragraph of that statement, officials tweaked their description of current conditions to give it an upgrade. "Moderately" was changed to "solid" to describe economic activity. It might seem benign, but it's potentially a big deal.

What if the U.S. economy, and the world, grows faster than anticipated over the next year or so? What if everyone braced for impact, but then there's no downturn or sluggish inflation?

Aside from the missing inflation, most readings on the American economy point upward. Manufacturing growth is close to a 13-year high, gross domestic product grew at least 3% the past two quarters, and numbers this week may show the jobless rate holding at a very low 4.2%. Even some measures of wages are showing signs of life.

This expansion has been running for eight years, though it seems people have only just begun to notice. The picture abroad keeps getting brighter, too. Far from imploding under a debt mountain, China's growth looks stable at around 7%, Japan continues to surprise and Europe — long dismissed as sclerotic and lumbering — almost has a spring in its step. Capital investment was a missing link; that too looks better as Bloomberg's Enda Curran wrote this week. Caterpillar, long a bellwether of global prospects, is also singing the "synchronized upswing" song.

Not that we want to get complacent. And we don't want to make too gigantic an extrapolation of the FOMC's first paragraph. But with many observers asking what could go wrong for the Fed in the next four years, perhaps we should turn the question around. What could go right? That would be an excellent surprise. We might even find the missing inflation. Imagine.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg and its owners.

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