As head of the Federal Reserve, the late Paul Volcker earned a reputation as an inflation fighter. Current chairman Jerome Powell wants to be known as a job crusader.
In a roughly 50-minute press conference after the Fed left interest rates unchanged on Wednesday, Powell repeatedly stressed his belief that the labour market can improve further despite unemployment being at a half-century low.
“Even though we’re at 3.5% unemployment, there’s actually more slack out there,” Powell said. “And the risks of using an accommodative monetary policy” to boost the labour market are “relatively low.’’
The bottom line for policy: The Fed will be in no rush to reverse its three recent interest rate cuts, even if the economy picks up steam and the odds of recession recede.
Indeed, policy makers projected no change in rates through 2020. That should be good news for President Donald Trump who is banking on a solid economy to help win re-election in November.
Powell opened the press conference with a tribute to Volcker, who died on Sunday at the age of 92, saying the legendary Fed chair’s fight to tame double-digit inflation laid “the foundation for the prosperity and price stability we enjoy today.’’
“There is definitely scope for unemployment to fall into 3.00-3.25% territory if the Fed truly decides to sit back and let conditions heat up. Our analysis shows that job growth will have to slow to 100,000-125,000 per month on a sustained basis for the unemployment rate to stop declining. We are handily exceeding that pace at present”, says Carl Riccadonna, Bloomberg economist.
Powell though made clear that the Fed faces a very different challenge now: Inflation that is not too high, but too low for the long-term health of the economy.
That’s the conundrum Japan has been grappling with for decades as it’s struggled to escape the economic malaise caused by prolonged deflation.
Acknowledging that inflation expectations have slipped below the Fed’s 2% target, Powell said he “would want to see a significant move up in inflation that’s also persistent before raising rates.’’
Peter Hooper, global head of economic research for Deutsche Bank, said that the Fed under Powell is entering a new regime where it no longer seeks to preemptively squash price pressures just because joblessness is low.
“The Fed is as dovish as I have ever seen them,’’ said Stephen Stanley, chief economist at Amherst Pierpont. “They cut three times because they were worried about downside risks. Now even if those risks disappear, they will tighten and take back the cuts only if inflation rises.’’
In fact, Powell said the Fed was still focused on the global economic slowdown and muted inflation pressures that caused it to reduce interest rates this year to a range of 1.5% to 1.75%.
“We put now in place policies that we think are appropriate to address those things,” he said. But “they haven’t gone away.”
Hanging over the economy is Trump’s threat to slap another round of tariffs on Chinese imports on December 15 – a move that some economists think could push the US to the brink of a recession.
Powell refused to be drawn into saying how the Fed would react should ongoing trade negotiations between the US and China break down. He also said that that the Fed did not discuss whether moves by Democrats in the House of Representatives to impeach Trump could undermine confidence in the economy. “We don’t consider things like that,” he said.
For now, Powell said that the economy and monetary policy “are in a good place.”
“We can sustain much lower levels of unemployment than had been thought,’’ Powell said. “That’s a good thing because that means we don’t have to worry so much about inflation and you see the benefits of that in today’s labour market.’’
That’s welcome news for workers and those on the fringes of the labour force who’ve had difficulty in getting jobs. Employment gains have been broad-based across racial and ethnic groups as Americans who had been left behind find jobs, Powell said.
African American unemployment is near record lows, though at 5.5% it is still well above the 3.5% level for the nation as a whole.
Wages have also been rising, particularly for lower-paying jobs, Powell said. But the salary increases of 3% to 3.5% are not so rapid as to suggest that the labour market is in danger of overheating and that inflation is about to take off, Powell said.
“To call it hot, you’d want to see heat, you’d want to see’’ even higher wages, he said.
Praising Volcker as someone who “always pursued the policies that he believed would ultimately benefit all Americans,’’ Powell said that he and his colleagues are trying to do the same today.
That means using monetary policy to extend the more than decade-long economic expansion, “so that the strong job market reaches more of those left behind.’’
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