Jerome Powell, the chairman of the U.S. Federal Reserve, in comments last week said that there was no evidence that the labor market was at risk of overheating. Speaking at an event in Boston, Powell gave his prepared remarks and brushed aside concerns of any sharp uptick in price pressures that could lead to inflation surprising by rising at a faster pace.
Addressing business economists, Powell pushed back against the criticism that officials at the Federal Reserve were maintaining a sustained projection of the economy. With unemployment staying low, some viewed the Fed as underestimating the prospects of a sharp increase in inflation.
Speculation is high that given the U.S. economy’s current trajectory, inflation is at serious risk of overshooting the Fed’s 2% inflation target rate.
The central bank was seen raising interest rates by 25 basis points just recently at its monetary policy meeting in September. The Fed funds rate was observed at 2.20% – 2.25%. The Fed’s dot plot which carries the individual projections were also released. The data showed that many members expect rates to rise by another percentage point through next year. This is indicative of four rate hikes next year as well.
Speculation is already rising that the Fed will follow through with one more rate hike this December.
The speech from the Fed Chair showed that there was no urgency to raise interest rates to prevent the U.S. economy from overheating.
The Fed’s economic projections showed an unfavorable set of conditions. The unemployment rate is expected to hold steady below 4% throughout the next three years. However, inflation is not projected by any members to overshoot the Fed’s target rate of 2.0%.
The Fed chair said that “that this is a remarkably positive outlook.” The U.S. economy was seen rising at a steady pace, a level never seen since the 1950’s. It comes amid both unemployment staying low and the inflation stable just around the Fed’s 2% threshold.
Economists continue to wonder if the current golden stretch dubbed the “Goldilocks” period will continue for an extended period.
The criticism comes due to the long-held view that inflation will rise as the unemployment level falls. Also known as the Phillips curve, this has received far greater attention and scrutiny amid spells of low inflation. The view is also quite popular among the Federal Reserve circles.
The Fed chair’s speech also gave out greater details including why the Fed’s forecasts are not too good to be true and why officials are not concerned about the risks of a broken Phillips curve.
In his speech, Powell said that changes in the Phillips curve would account for some level of surprise. However, he said that this was already shared by the current forecasts that were released at the September monetary policy meeting.
“I do not see it as likely that the Phillips curve is dead, or that it will soon exact revenge,” Powel said at the event.
The Fed chair assured that improvements in how the Fed conducts its monetary policy were based on anchoring consumer and business expectations on inflation. He said that this has significantly reduced but did not eliminate the effects of a tighter labor market and its influence on inflation.
He also assured the audience that the central bank would remain attentive to the changes in inflation expectations. He said that the Fed would stand ready to respond to any nasty surprises.
The Fed Chair welcomed the recent measures of rising wages and compensation. He said it was consistent with the recent trends in price gains and an increase in labor productivity growth.