Federal Reserve Chairman Jerome Powell delivered remarks on monetary policy in the current environment of low inflation and low unemployment in remarks at the annual meeting of the National Association for Business Economics on Monday.
Powell noted forecasts for the unemployment rate to remain below 4 percent and inflation to remain near 2 percent through the end of 2020 reflect a remarkably positive outlook from the standout point of the Fed’s dual mandate.
However, Powell acknowledged it is reasonable to question whether the forecasts are too good to be true, as low unemployment typically leads to higher wages and a subsequent increase in inflation in a dynamic known as the “Phillips curve.”
Powell argued changes in the dynamic help account for the current forecasts for low unemployment and low inflation and said it is not likely the “Phillips curve” is “dead” or will “soon exact revenge.”
“What is more likely, in my view, is that 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,” Powell said.
“However, no one fully understands the nature of these changes or the role they play in the current context,” he added. “Common sense suggests we should beware when forecasts predict events seldom before observed in the economy.”
Powell recognized there are concerns about the outlook for inflation due to the low unemployment rate but said the Fed stands ready to “act with authority” if inflation expectations drift materially up or down.
“This historically rare pairing of steady, low inflation and very low unemployment is testament to the fact that we remain in extraordinary times,” Powell said.
He added, “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.”
Last month, the Fed announced its widely expected decision to raise interest rates by a quarter point, with another quarter point rate hike expected before the end of the year.
by RTTNews Staff Writer
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