Fed chair signals gradual rate hikes
Washington – Federal Reserve Chairman Jerome Powell says the Fed will likely keep raising short-term interest rates at a gradual pace, partly because there are few signs, so far, that the ultra-low U.S. unemployment rate is pushing up inflation.
In a speech in Portugal, Powell said Wednesday that with the unemployment rate at an 18-year low of 3.8 percent and inflation near the Fed’s 2 percent target, the case for continued gradual increases in rates “is strong.”
Low unemployment historically has pushed up inflation as companies raise prices so they can pay more to keep workers. But Powell noted that the sharp drop in unemployment since the recession has occurred “without much apparent reaction from inflation,” according to prepared remarks.
That suggests the Fed is less likely to accelerate rate hikes preemptively to forestall potentially faster price gains.
Powell’s remarks at a central banking forum come just a week after the Fed raised its benchmark short-term rate for the second time this year. Fed policymakers signaled they will likely hike rates twice more this year. That was an increase from previous projections that they would do so only three times.
Yet Powell’s speech suggested that he doesn’t see the current low level of U.S. unemployment as likely to lead to runaway inflation anytime soon. Powell acknowledged that in the late 1960s, when the unemployment rate fell below 4 percent for roughly four years, inflation eventually hit 5 percent. That forced the Fed to raise interest rates and led to a mild recession.
Changes in the U.S. economy, however, make such an outcome less likely now, Powell said. American workers are more likely to be college graduates than in the late 1960s, and more-educated workers tend to have lower unemployment.
And inflation has been very low for nearly two decades, leading Americans to expect inflation to stay low, another change from the late 1960s, Powell said. Inflation expectations can be self-fulfilling: If workers assume price increases will be modest, then they are less likely to push for higher wages, while businesses are more likely to keep prices in check.
Powell also acknowledged that long periods of steady growth can cause bubbles in stocks or other assets, which can also cause downturns, such as the rampant increase in housing prices before the 2008-2009 Great Recession.
But he said there are few signs of that occurring now.
“While some asset prices are high by historical standards, I do not see broad signs of excessive borrowing,” he said.
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