Economy, jobs booming, but Fed is worried
WASHINGTON — America’s job market is booming and the economy is strong, but that combination is not raising prices the way it used to.
Biscuit Head, a North Carolina restaurant chain serving up gravy flights and homemade jam, would be charging more if the previous economic relationships held up. At 3.3 percent, unemployment in Asheville, N.C., home to three of Biscuit Head’s four locations, clocks in below the national average, and business is brisk. The owners, Carolyn and Jason Roy, have been lifting wages and offering new benefits as they seek to attract and retain staff.
Yet they haven’t raised prices on their giant buttermilk biscuits all that much. The stable pricing is sustainable partly because the Roys have gotten less picky about whom they hire. By looking at applicants with limited experience and even criminal records, they can find workers at wages that shrink — but don’t kill — their profit margins.
“It used to be that you’d look at resumes, and some things were an automatic disqualifier,” Carolyn Roy said. “Now there’s really no disqualifier. Anyone who comes in, we’ll interview them.”
Across the United States, a similar cocktail seems to be keeping inflation at bay: Employers are reluctant to charge more, unsure how consumers will react, and they’ve found an untapped supply of workers. It’s partly great news. More Americans are getting jobs than policymakers once thought possible, and wages and prices aren’t spinning out of control the way history would predict.
But it is posing a big challenge for the Federal Reserve. Stubbornly low inflation is raising questions about whether the central bank can achieve one of its primary goals — to keep prices growing slowly and steadily. By keeping interest rates low, it could also hinder the central bank’s ability to steer the economy should another downturn occur.
Inflation rose a scant 1.6 percent in the year ending in March, well short of the central bank’s 2 percent target. The Fed’s policymakers are worried about the continuing sluggishness, and President Donald Trump has repeatedly cited low inflation as a reason for the central bank to start cutting interest rates.
“We are doing very well at 3.2 percent GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!” Trump said in a recent tweet.
The Fed, for its part, is wrestling with how to respond to persistently low inflation amid what appears to be the weakening of a foundational economic relationship. Unemployment is at its lowest level since 1969, which should spur higher wages as companies compete for workers. Climbing labor costs should eventually get passed along to customers, driving inflation up. Instead, it is moderating.
While low inflation might sound great, a neverending shortfall might hurt the economy. Modest price increases can brighten the economic picture by allowing wages to rise without crushing profits. Janet L. Yellen, the Fed’s former chairwoman, often describes inflation as a lubricant on the wheels of the labor market: It keeps wages chugging along.
“I am concerned that inflation is running lower than I would expect, especially considering that now we’ve had sub-4 percent unemployment for a long time; we’ve had growth that’s surprised to the upside,” said James Bullard, president of the Federal Reserve Bank of St. Louis. “We’re on the wrong side, and it’s kind of going in the wrong direction.”
The breakdown leaves the Fed staring down an uncomfortable question. If officials can’t get that old chain reaction to work 10 years into an economic expansion, against a backdrop of tax cuts and high government spending, and with exceptionally low joblessness, will they ever?
The Fed’s chairman, Jerome H. Powell, has called weak inflation “one of the major challenges of our time.” In part to address it, he has led the Fed to embark on a yearlong review of its communications, tools and strategy. A major goal is determining what is reining in price gains and what can drive inflation back to the Fed’s target in a sustainable way.
Extra labor supply is one obvious culprit. Since 2016, at least some Fed officials have declared the labor market “at or near full employment.” But the job market keeps surprising them. Prime-age workers are hanging onto their positions for longer.
That’s provided an unexpected source of new employees, enabling brisk hiring to persist without a runup in wages and prices. Average hourly earnings have shown progress without rocketing up.
Officials have repeatedly lowered their estimates of sustainable unemployment as a result, and Richard Clarida, the Fed’s vice chairman, has suggested that the jobless rate is “not far below many estimates” at that revised level.