The Powell Fed sees no risk of overheating the labor market

The speech suggests that the Fed chairman has little urgency to push interest rates to a level designed to deliberately slow down the economy.

Economic forecasts released after the Fed's monetary policy meeting last week provided for an exceptionally favorable set of conditions in which the unemployment rate would remain below 4% over the next three years, without the prospect of a jobless spell. inflation exceeds the 2% target set by the Fed.

"It's a remarkably positive perspective," Powell acknowledged. Since 1950, the US economy has never had periods of both low and stable inflation rates and very low unemployment rates "for a period as long as described in these forecasts," he said. declared.

Whether or not the Fed realizes this "Goldilocks" economy is not dependent on the fact that inflation behaves as expected.

Economists have long argued that inflation increases with falling unemployment, and vice versa. The framework, known as the Phillips Curve, has been the subject of further scrutiny during periods of low inflation in recent decades, but remains popular within the Fed.

Mr. Powell's speech further elaborated on two arguments: why the Fed's forecasts are not too good to be true and why managers do not have to fear a broken Phillips curve or a surge of surprise inflation .

The changes in the Phillips curve "help explain the current somewhat surprising but shared forecasts," Powell said. "I do not think it's likely that the Phillips curve is dead or that it will soon take a revenge."

Instead, Mr. Powell said that improvements in the way that central banks conduct monetary policy over the past few decades, primarily by anchoring consumer and business expectations about future inflation, have "significantly reduced, but not eliminated, the effects of the tightening of the labor market on inflation."

For this reason, Mr. Powell said that the Fed would be particularly attentive to the evolution of inflation expectations and that it would be "ready to act with the authority of the material drift of the anticipations, "he said.

Powell said recent measures of higher wages and salaries are "rather welcome". As these increases are consistent with recent price gains and labor productivity growth, Mr. Powell said he did not see evidence of a labor market becoming unbalanced. or overheating.

While Powell said the Fed was taking seriously the possibility that inflation is accelerating faster than his colleagues and he expected, their best estimates suggest that expectations of inflation are likely to increase. anchored inflation would only lead to a "slight acceleration" of the Phillips curve.

According to him, his current outlook suggests that it would not be powerful enough to spur inflation and force the Fed to aggressively raise rates.

At the same time, Powell said that it was possible that the Fed continued to overestimate the level of unemployment matching the stability of inflation. Most Fed officials expect the unemployment rate to be between 4.3 percent and 4.6 percent, according to forecasts at the Fed meeting last week. The unemployment rate was 3.9% in August.

Mr. Powell did not say whether he felt it was possible for this estimate of the natural unemployment rate to be lower. Instead, he said the current trend of the Fed to gradually raise interest rates is designed to counterbalance the risks that the Phillips curve is steeper than expected or that the unemployment rate may fall without generating price pressures.

The interest rate forecasts released last week show two different streams of thinking about how the Fed could proceed to raise rates.

A group of officials said that as long as unemployment continues to fall below the projected level, which is consistent with low and stable inflation, the Fed will have to raise its rates to prevent overheating of the economy. This is a non-controversial strategy because it is what the central bank is still doing at this stage of its expansion.

Another side argues for a relatively radical departure from this norm. According to these officials, if inflation does not seem to accelerate beyond 2%, the Fed could stop raising rates after reaching a neutral parameter that neither stimulates nor slows growth.

Unlike other Fed colleagues, Powell did not mention in his speech the prospect that the central bank should raise rates to a level designed to slow the growth of the economy.

Mr Powell said it was important, however, to remain skeptical about recent forecasts. "Common sense suggests that we should be wary when forecasts predict events rarely seen before in the economy," he said.

Write to Nick Timiraos at [email protected] and Paul Kiernan at [email protected]