Key Takeaways
- Federal Reserve Chair Powell’s assessment of the economy being in “pretty good shape” signals a central bank comfortable with its current restrictive policy, suggesting the bar for rate adjustments in either direction remains high.
- The economic data presents a fundamentally divided picture; a resilient labour market provides a crucial buffer, yet sticky inflation and weakening forward-looking indicators create a fragile equilibrium.
- Markets appear to be pricing in a benign ‘soft landing’, but the more significant risk may be a policy error where the Fed is forced to choose between its dual mandates if the labour market falters before inflation is decisively tamed.
- Increasing political scrutiny ahead of a potential change in administration introduces a significant, unquantifiable variable to the Fed’s policy trajectory, potentially influencing its perceived independence and complicating market expectations.
Federal Reserve Chair Jerome Powell’s recent characterisation of the United States economy as being in “pretty good shape” should be interpreted less as a declaration of strength and more as a statement of policy inertia. This carefully chosen language signals a central bank that sees little urgency to alter its course, viewing the current state of affairs as sufficient to continue its campaign against inflation without triggering a severe downturn. For investors, this suggests a prolonged period of restrictive monetary policy, where the primary risk is not an imminent recession, but rather the cumulative effect of high rates on an economy showing clear signs of divergence beneath its placid surface.
The Anatomy of ‘Good Shape’
From the Federal Reserve’s perspective, a “good shape” economy is one that affords it patience. The foundation of this view is a labour market that has consistently defied expectations of a significant cooling. With unemployment remaining historically low and wage growth moderating but still firm, the Fed has a crucial buffer against accusations of overtightening. This allows it to maintain its singular focus on returning inflation to the 2% target, a task that has proven more arduous than anticipated.
However, this narrative of stability is built upon conflicting data points. While the labour market provides a solid backstop, other indicators paint a more nuanced picture of an economy losing momentum under the weight of sustained high interest rates. The tension between these resilient and weakening factors is the central challenge for policymakers and investors alike.
A Divided Economic Dashboard
A closer examination of key indicators reveals why the Fed’s position is one of cautious observation rather than victory. The resilience in employment contrasts sharply with softening consumer sentiment and revised, weaker GDP figures from earlier in the year. This is not the profile of a robustly expanding economy, but one in a state of delicate balance.
| Economic Indicator | Latest Reading (Approximate) | Implication for Fed Policy |
|---|---|---|
| Core PCE Inflation (YoY) | 2.8% | Still significantly above the 2% target, justifying a restrictive stance. |
| Unemployment Rate | 4.0% | Low level provides the Fed with flexibility to hold rates higher for longer. |
| Non-Farm Payrolls (Monthly) | +272,000 | Indicates persistent labour market tightness, a key inflationary concern. |
| Consumer Sentiment (Michigan) | 65.6 | Declining sentiment points towards future weakness in consumer spending. |
Source: Data compiled from Bureau of Labor Statistics, Bureau of Economic Analysis, and University of Michigan surveys.
The Unspoken Variable: Political Calculus
Looming over the Fed’s data-dependent approach is an increasingly contentious political environment. The central bank’s actions, particularly its handling of interest rates, are becoming a focal point of political discourse. Public criticism from political figures, including former President Trump, regarding the level of interest rates compared to other nations, threatens to politicise the institution’s mandate. 1, 2
This external pressure creates an unquantifiable risk. While the Federal Reserve officially operates independently, the prospect of a future administration seeking to exert more direct influence could subtly shape its decisions. 3 Any policy move, or lack thereof, will be scrutinised through a political lens, potentially constraining the Fed’s ability to act pre-emptively and forcing it into a more reactive posture. This adds a layer of uncertainty that pure economic models cannot capture, complicating the outlook for both interest rates and market stability.
Conclusion: Positioning for Inertia and Tail Risk
For the time being, Powell’s commentary reinforces a “higher for longer” reality. This environment likely favours quality and companies with durable cash flows that are less reliant on cheap capital for growth. The continued outperformance of a narrow segment of mega-cap technology stocks is, in part, a reflection of this dynamic. Investors are paying a premium for secular growth stories that can thrive even in a stagnant broader economy.
The core implication is that market participants should position for policy inertia while actively hedging against the primary tail risk: a Fed policy error. The ‘soft landing’ narrative is now a consensus view, leaving it vulnerable to shocks. The most potent risk is not a sudden economic collapse, but a scenario where the labour market finally begins to crack while inflation remains stubbornly above target.
This leads to a speculative but critical hypothesis: should unemployment tick up meaningfully while Core PCE remains stuck above 2.5%, the Fed will face an impossible choice between its dual mandates. In this scenario, the initial market reaction may not be a dovish pivot rally, but a sharp widening of credit spreads as the market prices in a stagflationary policy mistake, well before the equity markets fully capitulate.
References
1. Gremore, G. (2024, June 30). Trump attacks Fed chairman as ‘your friend Jerome Powell’. The Washington Post. Retrieved from https://washingtonpost.com/business/2025/06/30/trump-attacks-fed-chairman
2. Creitz, C. (2024, May 29). Trump sends ‘Mr. Too-Late’ Jerome Powell note showing how other nations trounce US on interest rates. Fox Business. Retrieved from https://foxbusiness.com/politics/trump-sends-mr-too-late-jerome-powell-note-showing-showing-how-other-nations-trounce-us-interest-rates
3. Schneider, H., & Saphir, A. (2024, June 18). Fed set to hold rates steady as Mideast crisis, tariffs cloud outlook. Reuters. Retrieved from https://www.reuters.com/business/fed-set-hold-rates-steady-middle-east-crisis-tariffs-cloud-outlook-2025-06-18/
4. @FinFluentialx. (2024, October 2). BREAKING ⚠️ FED CHAIR POWELL: UNITED STATES ECONOMY IS IN PRETTY GOOD SHAPE [Post]. Retrieved from https://x.com/FinFluentialx/status/1840481984830955996
5. Cox, J. (2024, September 18). Fed chair Powell says the US economy is in a solid position. Fox Business. Retrieved from https://www.foxbusiness.com/economy/fed-chair-powell-says-us-economy-solid-position
6. Federal Reserve. (2024). Press Conference [Video broadcast]. Retrieved from https://www.federalreserve.gov/live-broadcast.htm
