NEW YORK: US Federal Reserve Chairman Jerome Powell on Tuesday hailed a remarkably positive outlook for the US economy that he feels is on the verge of a historically rare era of ultra-low unemployment and tame prices.The situation, with below 4 per cent unemployment expected through at least two more years, and inflation that will remain modest even as wages rise, would be unique in modern US data, Powell acknowledged.To guard against the revenge of rising prices typically associated with such low unemployment, Powell said, required the Fed to continue to gradually increase interest rates.
But he also argued that, far from being too good to be true, the Feds current projections are fully acknowledging changes in the economy that could mean inflation remains modest almost regardless even as unemployment falls.This forecast is not too good to be true, Powell said, but instead is testament to the fact that we remain in extraordinary times.These developments amount to a better world for households and businesses which no longer experience or even fear the scourge of high and volatile inflation.That lack of fear, and the firm promise of central banks to keep inflation in check, he said, was the reason why price increases have remained in check - and also why, even during the decline of the Great Recession, a deflation did not take hold.
The possibly changed connection between inflation and unemployment has been central to economic debate since the 2007 crisis.Several now-departed Fed policymakers warned persistently, for example, that as the unemployment rate dropped and the Fed printed trillions of new dollars, runaway inflation was just around the corner.
It never happened, raising speculation that the Phillips curve relationship between low unemployment and rising inflation was dead or at least very weak.Powell said policymakers take seriously the risk that the relationship could revive as unemployment gets lower, and that precautionary interest rate increases were therefore justified.
But his remarks argue that the economy has become immunised against the sort of runaway price increases that took hold in the 1960s, and that all the Fed need do is keep its promise to react to risks that might allow inflationary psychology to take hold.