Jay Powell says ‘room to build’ on US economic expansion
The Federal Reserve will focus on increasing workforce participation and avoiding a drop in inflation expectations as it considers its next steps, chairman Jay Powell said on Monday.
Speaking to the Greater Providence Chamber of Commerce in Rhode Island, Mr Powell said the US economy was “generally good”, but added that there was still room for improvement.
“First, as this expansion continues into its 11th year — the longest in US history — economic conditions are generally good,” he said. “Second, the benefits of the long expansion are only now reaching many communities, and there is plenty of room to build on the impressive gains achieved so far.”
Mr Powell also repeated a plea he had made this year for Congress to do more to help train workers and get them back into the labour force.
“The literature suggests a variety of policies, beyond the scope of monetary policy, that could spur further progress,” he said. “Of course, the task of evaluating the costs and benefits of these policies falls to our elected representatives.”
At its October meeting, after completing a round of 75 basis points of total cuts to US interest rates this year, the Federal Open Market Committee suggested that it would wait for more data before it made any more changes to its policy.
Instead, the Fed will encourage more prime-age workers to start looking for work again. And it will pay closer attention to the danger that expectations of future inflation among consumers and businesses will slip even further down, as they have in Japan and Europe.
The US unemployment rate is now at half-century lows. Mr Powell pointed out, as he frequently does, that “employment gains have been broad-based across all racial and ethnic groups and all levels of educational attainment”.
Further, he added, the strength of the US labour market has encouraged “prime-age” workers — between ages 25 and 54 — to rejoin the workforce. Income growth for low-income households increases as people re-enter the labour force — but even after recent improvements, the US still lags other advanced economies in labour-force participation.
At an event earlier in the day, Mr Powell had listened in an elementary school gym in East Hartford, Connecticut, to various ways that the local and state government, working with the Boston Federal Reserve, had helped to get locals into high-paying jobs — by training them to build aircraft engines at the nearby Pratt & Whitney factory, for example.
The Fed’s rate-setting committee can help, too, by encouraging full employment, Mr Powell said. Echoing his comments to Congress during testimony earlier in November, he added that legislators also pass laws that encourage work and pay for training.
Mr Powell also said while the people he talked with at the Fed’s public events were focused on the rising costs of medical care and housing, he was worried that the possibility of inflation expectations — predictions among households and businesses of what prices increases will be in the future — would continue to drop, dragging down actual inflation, and with it interest rates.
“The experience of Japan, and now the euro area, suggests that this dynamic is very difficult to reverse,” he said. “Once under way, it can make it harder for a central bank to support its economy by further lowering interest rates.”
Mr Powell’s comments follow a series of discussions at Fed meetings over what economists call “Japanification”. It is essential, he added, for the Fed to prevent an “unhealthy downward drift” in inflation expectations.