This is almost the 'too good to be true' economy, Fed chair says

  • By Heather Long,
  • The Washington Post
  • Economic Insight
  • Economic Insight
  • Economic Insight
  • Economic Insight
  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

Federal Reserve Chair Jerome H. Powell said Tuesday that the U.S. economy appears to be in the midst of a "remarkably positive" period that is unprecedented in modern history.

The Fed is predicting that unemployment will remain below 4 percent through 2020 and that inflation will stay low — around 2 percent — during that time. This has never happened in modern U.S. history. The last time unemployment was that low for several years, in the 1960s, it triggered high inflation, but the central bank and many outside forecasters don't think that will occur this time.

"This historically rare pairing of steady, low inflation and very low unemployment is a testament to the fact we remain in extraordinary times," Powell said in a speech at the annual meeting of the National Association for Business Economics (NABE) in Boston. "I was asked at last week's news conference whether these forecasts are too good to be true — a reasonable question."

President Trump has taken credit for the strong U.S. economy, going as far as to call it the "greatest economy in the history of our country." Powell has been careful not to wade into discussions of who deserves credit for the economy since the Fed is an independent body, but he said last week that the tax cuts have played a role in boosting growth.

There is uneasiness at the Fed about predicting such an unprecedentedly rosy period. A survey of 51 NABE economic forecasters released Monday found that more than half predict that the next recession will start in 2020, a reminder of the growing concern that something will go awry.

Powell said he and his colleagues have a contingency plan in place if the economy veers off the path they are predicting. But for now, the Fed is committed to raising interest rates in a slow and steady way.

"Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times," he said, adding that "we will use the tools we used in the financial crisis, to the extent we have to" if a downturn comes.

Trump has criticized Powell for raising interest rates too quickly, which the president fears could curb growth and job opportunities. But Powell is sticking to his plan to increase rates up to about 3 percent, which the Fed considers a level that would neither stimulate the economy nor dampen it. The Fed's current benchmark interest rate sits in a range of 2 percent to 2.25 percent.

When unemployment is this low, businesses typically struggle to find workers, and companies are often forced to raise wages to lure workers. That in turn causes businesses to increase prices for consumers. This relationship between unemployment and inflation is known as the Phillips curve among economists, but some have questioned lately whether the curve is dead.

Powell said he doesn't think the Phillips curve is dead, but he also doesn't think inflation is going to jump anytime soon, even though the labor market is much tighter. He argues that the Fed is aware of the risks and is doing a more active job of managing inflation expectations than in the 1960s. He thinks the scenario now is more likely to be similar to what happened during the dot-com boom, when unemployment briefly fell below 4 percent and inflation stayed tame because of the Fed's actions and a boost in worker productivity.

Wages are rising at their fastest rate in a decade, a sign of the growing tightness of the labor market. Retailers and fast-food chains are offering such perks as free meals, bonuses and transit cards to recruit holiday workers, and Amazon.com (AMZN), the country's second-largest private employer, announced Tuesday that it is raising pay to at least $15 an hour for all of its 350,000 workers. (Amazon founder and CEO Jeffrey P. Bezos owns The Washington Post.)

Powell called it "quite welcome" that wages are finally rising at a faster rate for workers and said it is also encouraging that inflation has remained at the Fed's 2 percent target despite the pay increases.

  • Facebook.
  • Twitter.
  • LinkedIn.
  • Google Plus
  • Print

For more news you can use to help guide your financial life, visit our Insights page.


© 2018 The Washington Post
Votes are submitted voluntarily by individuals and reflect their own opinion of the article's helpfulness. A percentage value for helpfulness will display once a sufficient number of votes have been submitted.
close
Please enter a valid e-mail address
Please enter a valid e-mail address
Important legal information about the e-mail you will be sending. By using this service, you agree to input your real e-mail address and only send it to people you know. It is a violation of law in some jurisdictions to falsely identify yourself in an e-mail. All information you provide will be used by Fidelity solely for the purpose of sending the e-mail on your behalf.The subject line of the e-mail you send will be "Fidelity.com: "

Your e-mail has been sent.
close

Your e-mail has been sent.