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Fed’s Powell Says Economic Outlook Remains Sunny Fed’s Powell Says Strong Economic Path ‘Not Too Good to Be True’
(about 3 hours later)
BOSTON — Jerome H. Powell, the Federal Reserve chairman, said Tuesday that the current combination of low inflation and low unemployment is “not too good to be true,” and that the pleasant pairing could continue for some time. BOSTON — Jerome H. Powell, the Federal Reserve chairman, said Tuesday that the American economy is enjoying an unusual but sustainable period of low unemployment and low inflation. He described the current moment, and the Fed’s expectation that it will continue, as “not too good to be true.”
The American economy is experiencing what Mr. Powell recently called a “particularly bright moment.” Inflation is hovering around the 2 percent annual pace the Fed regards as optimal while the unemployment rate was just 3.9 percent in August. Fed officials have predicted that both inflation and unemployment will remain around the same low level for the next several years. Inflation is hovering around the 2 percent annual pace that the central bank regards as optimal while the unemployment rate has remained close to 4 percent for the last year. Economists have long regarded low unemployment as a harbinger of higher inflation, and there is no precedent in modern American history for both economic indicators to remain at such low levels.
There is no historical precedent for such an extended period of low inflation and low unemployment. But Mr. Powell said there was reason to believe that this time could be different. But Mr. Powell said there was reason to believe this time could be different.
He said the Fed’s success in holding down inflation in recent decades has reinforced a public expectation that it would remain low, and that, in turn, is helping to hold down prices. He said the Fed’s success in holding down inflation in recent decades has reinforced public expectations that inflation would stay low, and that, in turn, is helping to keep inflation low.
“These developments amount to a better world for households and businesses, which no longer experience or even fear the scourge of high and volatile inflation,” Mr. Powell said of this anchoring of expectations, according to the prepared text of remarks scheduled for delivery Tuesday afternoon in Boston at the annual meeting of the National Association for Business Economics. “These developments amount to a better world for households and businesses, which no longer experience or even fear the scourge of high and volatile inflation,” Mr. Powell said on Tuesday in Boston at the annual meeting of the National Association for Business Economics.
The Fed raised its benchmark interest rate in September for the third time this year, into a range between 2 and 2.25 percent. Another quarter-point increase is expected in December. Mr. Powell, speaking a few hours after Amazon announced it would raise its entry-level wage to $15 an hour, said evidence of increased wage growth is “quite welcome.”
Mr. Powell described the Fed’s march toward higher rates as rooted in risk management. The Fed is raising rates because it sees some risk that inflation will creep up as companies increasingly struggle to find enough workers. Yet the Fed is also moving slowly because it sees some risk that raising rates too quickly would impede economic growth. The Fed chairman’s remarks are likely to resonate with Trump administration officials, who insist that faster economic growth is sustainable. “I’m in favor of higher wages,” Larry Kudlow, the president’s chief economic adviser, told reporters on Tuesday after Amazon’s announcement. “More people working and prospering — you’ve heard me say this before — is not inflationary. It’s a good thing, not a bad thing.”
“Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times, so as to extend the current expansion, while maintaining maximum employment and low and stable inflation,” he said. Fed officials have long assumed inflation and unemployment sit on opposite ends of a seesaw: As unemployment falls, inflation tends to rise; as unemployment rises, inflation tends to fall.
The volatility of inflation has greatly diminished in recent decades. During the middle of the last century, inflation rose during periods of low unemployment and fell during periods of high unemployment. Over the last few decades, inflation has held relatively steady through the ups and downs of the broader economy. That model, known as the Phillips curve, accurately described the relationship between inflation and unemployment in the middle of the 20th century. But the volatility of inflation has diminished in recent decades. As unemployment has swelled and subsided, inflation has remained low and steady.
Some economists see that pattern as evidence of a weakened relationship between inflation and unemployment. Mr. Powell argued on Tuesday that the link still exists, but people now have greater confidence in the Fed’s ability and determination to maintain control of inflation. As a result, the reaction to changes in economic conditions has been muted. Mr. Powell said Tuesday that the relationship has been weakened by the Fed’s success in controlling inflation, which has instilled confidence that the Fed will continue to control inflation. As a result, even when unemployment falls, investors are not as quick to build higher inflation expectations into asset prices.
“The key is the anchored expectations,” he said. “Many factors, including better conduct of monetary policy over the past few decades, have greatly reduced but not eliminated the effects that tight labor markets have on inflation,” Mr. Powell said.
Mr. Powell’s view suggests that inflation is unlikely to rise quickly even as the labor market continues to tighten. Between August 2017 and August 2018, the most recent available data, average hourly wages increased by 2.9 percent, although, adjusting for inflation, the increase was just 0.2 percent, federal data shows. The government will release September wage data on Friday.
While the Fed sees little slack in the economy, Mr. Powell said he did not see wage growth as an indication that the economy was beginning to overheat since wages were rising in line with inflation and productivity. Even if wage growth began to outpace inflation and productivity, Mr. Powell said it still might not foretell faster inflation, pointing to the example of the 1990s.
“The key is anchored expectations” for stable inflation, Mr. Powell said.
He added, however, that the Fed would remain watchful. “Common sense suggests we should beware when forecasts predict events seldom before observed in the economy,” he said.
The Fed is raising interest rates slowly and steadily, which Mr. Powell described as a form of risk management. The Fed raised its benchmark interest rate in September for the third time this year, into a range between 2 and 2.25 percent. Another quarter-point increase is expected in December.
Mr. Powell said that the Fed was raising rates because it might be wrong about the dangers of inflation, but that it was moving slowly because it did not want to impede or end economic growth.
“Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times, so as to extend the current expansion, while maintaining maximum employment and low and stable inflation,” Mr. Powell said.
During a question-and-answer session, Mr. Powell was asked about the economic effects of the Trump administration’s tax cuts and trade policies. He said that the tax cuts had provided a short-term boost to growth, but that it was too early to tell whether the cuts would encourage investment that might increase growth in the longer term. On trade restrictions, he said that the Fed did not yet see evidence of any broad economic effect, but that it was probably too early to judge the effects.
Mr. Powell said the Fed also was paying attention to the economic performance of the rest of the world. The recovery in other developed nations has lagged behind that of the United States, but Mr. Powell said the overall picture remained “reasonably positive.”
“I think growth is still healthy, but maybe under a little pressure,” he said.