Bloomberg News/Landov Fed Chairman Jerome Powell, right, talks with Kansas City Fed President Esther George and New York Fed President John Williams at the Jackson Hole retreat in August.
The Federal Reserve has a chance to do something no U.S. central bank has done before, if it can slow the economy and raise the unemployment rate without pushing the economy into recession, said Peter Hooper, chief economist at Deutsche Bank Securities.
“The Powell Fed can make history by engineering a soft landing from below,” Hooper said in an interview.
At the moment, the unemployment rate is 3.9%, below the 4.5% level the Fed believes the “natural rate” of unemployment or where inflation neither slows down or speeds up.
All this comes at a time when there is increasing talk on Wall Street about a possible recession for 2020 or 2021, Hooper said. Such talk is natural given the economic expansion is the second-longest in history at 36 straight quarters, he said.
Read: Fed has to start considering the risk of a recession, former governor says
Signals of investor concern about the outlook are one reason the yield curve — the difference in yield between the long TMUBMUSD10Y, -0.33% and short TMUBMUSD02Y, -0.28% ends — has flattened, he noted. Concern about the outlook is holding down the long-end of the yield curve as the Fed raises the short end.
Hooper said the Powell Fed has several factors going for it in its bid to make history.
First, there is no significant overhang of investment in durable goods or related financial imbalances to exacerbate any downturn. Secondly, the Phillips curve seems to be relatively flat, meaning the tight labor market is not causing inflation to flare. This allows the Fed to raise interest rates gradually. Third, the U.S. economy is less sensitive to oil market shocks.
Recession fears remain, at the moment, a small dark cloud in the horizon. With the economy growing at a fast clip and the labor market still tightening, the Fed is expected to keep raising rates at a gradual pace later this week and to signal more rate hikes ahead. Talk of a recession is not likely even to enter the Fed’s official forecast, even though the central bank must extend its projections out to 2021, Hooper said in the interview.
“I don’t think there will be any hint in the 2021 numbers,” Hooper said.
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Even if the Fed were unable to avoid a downturn, the factors that gave the central bank a chance to make history, should make any recession that does occur “mild and brief,” Hooper said.
