Powell: U.S. in positive period
Fed chief upbeat on rates, inflation
WASHINGTON — Federal Reserve Chairman Jerome Powell said Tuesday that the U.S. economy appears to be in the midst of a “remarkably positive” period that is unprecedented in modern history.
The Fed is predicting unemployment will remain below 4 percent through 2020 and that inflation will remain low — around 2 percent — during that time. This has never happened before in modern U.S. history. The last time unemployment was that low for several years, in the 1960s, it triggered high inflation, but the central bank and many outside forecasters don’t believe that will occur this time.
“This historically rare pairing of steady, low inflation and very low unemployment is a testament to the fact we remain in extraordinary times,” Powell said at the annual meeting of the National Association for Business Economics. “I was asked at last week’s news conference whether these forecasts are too good to be true — a reasonable question.”
There is uneasiness at the Fed about predicting such an unprecedentedly rosy period, and Powell said he and his colleagues have a contingency plan in place if
the economy veers off the path they are predicting.
“Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times,” he said.
The central bank is trying to make sure it doesn’t raise rates too quickly and push the country into a recession, or move too slowly and set off higher inflation, he said.
Powell’s comments came a week after the central bank approved a third quarter-point increase in its benchmark policy rate, pushing it to a level of 2 percent to 2.25 percent.
President Donald Trump has taken credit for the strong U.S. economy and also criticized the Fed for raising interest rates too quickly, which Trump fears could cause
growth to falter. Powell has been careful not to make political comments since the Fed is an independent body, but he did say last week that the tax cuts have played a role in boosting growth.
When unemployment is this low, businesses typically struggle to find workers and companies are often forced to raise pay to try to lure workers to their firms. That, in turn, causes businesses to raise prices that consumers pay at the store or elsewhere. This relationship between unemployment and inflation is known as the Phillips Curve among economists, but some have questioned lately whether the curve is dead.
Powell said he doesn’t think the Phillips Curve is dead, but he also doesn’t think inflation is going to jump anytime soon even though the labor market is much tighter now. He argues the Fed is aware of the risks and doing a much more active job
of managing inflation expectations than in the 1960s, which should help keep a lid on inflation, similar to what happened in the 1990s economic boom.
Wages are rising at their fastest rate in a decade, a sign of the growing tightness of the labor market. Retailers and fast food chains are offering perks like free meals, special bonuses and transit cards to recruit holiday workers, and Amazon, America’s second largest employer, just announced it is raising pay to at least $15 an hour among all of its 350,000 workers.
Powell called it “quite welcome” that wages are finally rising faster for workers and it is also encouraging that inflation has remained at the Fed’s 2 percent target despite the pay increases.