Home / Business / Fed president says inflation-unemployment relationship is gone

Fed president says inflation-unemployment relationship is gone

Federal Reserve Chairman Jerome Powell said the relationship between unemployment and inflation has collapsed.

"The relationship between the slowdown in the economy or unemployment and inflation was strong fifty years ago (…) and disappeared," Powell said in his testimony before the Senate Committee of the United States. banks. "At least twenty years ago, this period was over and the relationship between unemployment and inflation was becoming weak, and it became weaker and weaker," he said.

"Moreover, we learn that the neutral interest rate is lower than we thought and … that the natural unemployment rate is lower than we thought." Monetary policy does not have been as accommodating as we had thought, "Powell said.

In the Fed's dual mandate of full employment and price stability, the unemployment rate has been historically low, from 3.6% in May to 3.7% in June, the lowest level ever. registered since 1969. Inflation has risen sharply and a half in June, has been tamed in recent years and is consistently below the target of 2% set by the Fed.

The so-called "Phillips curve" argues that, if unemployment falls, inflation is expected to increase, a phenomenon that has not occurred during this economic expansion.

"At the end of the day, there has to be a link, because low employment will drive up wages, and ultimately a rise in wages will lead to inflation, but we have not reached that stage. , this link between the two quotes little these days, "said the head of the Fed.

The Fed lowered its inflation target for 2019 at its June policy meeting, recording lower inflation rising to 1.5%, compared to 1.8% expected in March.

Markets are betting that the Fed will cut rates later this month in part because inflation has remained so low. Powell's testimony also nurtured the hope of an easier policy.

Powell said Wednesday that the Fed "would do the right thing" to support its expansion as "cross currents" weigh on the economic outlook. He pointed out that commercial investment in the United States has slowed "noticeably" recently.

Source link