Amid low unemployment, Fed pressed to do more

WASHINGTON >> With the nation’s unemployment rate at its lowest point since human beings first walked on the moon, you might expect the Federal Reserve to be raising interest rates to keep the economy from overheating and igniting inflation.

That’s what the rules of economics would suggest. Yet the Fed is moving in precisely the opposite direction: It is widely expected late this month to cut rates for the third time this year.

Welcome to the strange world that Jerome Powell inhabits as chairman of the world’s most influential central bank. Though unemployment is low, so are inflation and long-term borrowing rates. Normally, all that would be cause for celebration. But with President Donald Trump’s trade wars slowing growth and overseas economies struggling, Powell faces pressure to keep cutting rates to sustain the U.S. economic expansion.

“It’s a very hard position for the Fed to be in,” said Diane Swonk, chief economist for Grant Thornton, a consulting firm.

When Powell speaks Tuesday afternoon at an economics conference in Denver, his remarks will be scrutinized for any hints of the Fed’s next steps.

One illustration of the Fed’s unusual dilemma: The unemployment rate is now 3.5%, the lowest level since 1969. The Fed’s benchmark short-term rate stands in a range of just 1.75% to 2%. By comparison, the last time unemployment fell below 4% — in 2000 — it raised its key rate to 6.5% to try to control inflation, which normally rises as unemployment falls. Having its benchmark rate that high also gave the Fed room to cut rates once a recession hit the next year.

Today’s economic landscape is dramatically different. The same forces that are depressing growth and inflation and limiting pay growth are also boxing in the Fed: Slowing population growth and sluggish worker productivity are restraining the economy’s ability to expand.

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