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Fed’s Powell risks inflation to push economic benefits for those at the bottom

Jerome Powell
Federal Reserve Chairman Jerome Powell speaks at a news conference in Washington, D.C., last December.
(Susan Walsh / Associated Press)

Federal Reserve Chairman Jerome H. Powell probably will kick off his post-meeting news conference on Wednesday the same way he’s begun every one this year. The Fed, he’ll tell reporters, has “one overarching goal: to sustain the economic expansion.”

Behind that anodyne mission statement lies a grand ambition. Powell is effectively taking on a task that many of his inflation-wary predecessors shunned: extend the fruits of a growing economy to those who rarely benefit, from struggling African American families to poor rural white people.

The improvement in the jobs market has “started to reach communities at the edge of the workforce,” Powell told lawmakers this month. “It’s just so important for us to continue that process for a couple of years.”

That means keeping the economy growing at or ideally somewhat above its long-run cruising speed of about 2%, and running a high-pressure labor market by holding unemployment down at levels many economists think unsustainable.

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To help in that effort and to protect the U.S. from downside risks from abroad, the Fed chief and his Federal Open Market Committee colleagues are expected to cut interest rates by a quarter of a percentage point after meeting Tuesday and Wednesday, lowering borrowing costs for the first time in more than a decade.

“I can’t remember a Fed chair who was as emphatic about the benefits of this high-pressure labor market to people who have long been left behind,” said Jared Bernstein, a onetime advisor to former Vice President Joe Biden who’s now at the Center on Budget and Policy Priorities.

Powell can afford to stoke the record-long expansion because inflation is contained and shows no sign of taking off, even with unemployment near a half-century low. Indeed, the Fed would welcome some rise in price pressures after years in which inflation has languished below its 2% target.

The Fed chief also may be betting that pumped-up demand from lower borrowing costs will be met with added supply from the economy that will keep prices from skyrocketing.

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That’s what happened in 2018 — as highlighted by Vice Chairman Richard Clarida, Powell’s lieutenant. In that instance, a step-up in growth of gross domestic product on the back of President Trump’s tax cuts was supported by an expansion in the labor force and bigger gains in productivity.

There are risks, of course. Inflation may end up not being as tame as the Fed believes. There’s also a chance that low interest rates will lead to economically dangerous asset bubbles and excessive borrowing that will haunt the economy later.

The politics also are messy. With Trump having relentlessly criticized the Fed for a year for keeping credit too tight, any move to lower rates could fan speculation on Wall Street and in Washington that Powell is knuckling under to the president.

The president attacked the central bank again on Monday, accusing it in a tweet of making “all the wrong moves” and saying a small rate cut this week wouldn’t be enough.

Powell heard firsthand about the broad-based benefits of a tight jobs market at a Chicago Fed conference in June.

“This is a great time” for economically vulnerable Americans who’ve had trouble getting a job, Patrick Dujakovich, president of the Greater Kansas City AFL-CIO, told the gathering. “There are a lot of prerequisites being waived” for getting hired.

Employers are taking on workers with limited skills and limited or no experience, and hiring Americans with criminal records and disabilities, who’ve struggled in the past to gain a foothold in the labor market. Companies are also being forced to raise wages to retain some lower-educated employees.

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And after suffering disproportionately during the 2007-09 recession and its aftermath, black and Latino people are benefiting as well, with their unemployment rates falling more steeply than the national average.

The Americans being helped the most by the tight labor market are “people at the bottom,” said former Fed Vice Chairman Alan Blinder, adding, “It’s not that opportunities for people with MBAs are getting bigger.”

Powell has made clear he sees more room to run. At a congressional hearing this month, he took issue with a suggestion that the U.S. has a hot labor market.

“To call something hot, you need to see some heat,” he said, noting that wage growth has picked up but not yet surged.

In a lively exchange at that same hearing with New York representative and social media star Alexandria Ocasio-Cortez, Powell said the current 3.7% unemployment rate was “well within the range of potential estimates” of its long-run natural state. That suggests he’s comfortable with joblessness remaining near half-century lows or perhaps even edging lower.

It was in 1973 when influential economist Arthur Okun asked whether a high-pressure economy could contribute to upward mobility of workers. But a subsequent outbreak of double-digit inflation convinced central bankers that wasn’t the way to go.

Now may be time for a rethink, Powell suggested in a speech in Paris this month. Policymakers face a different world today: a world of low inflation, globalization and aging societies.

It’s also a world where yawning income and wealth gaps are spurring a populist backlash against the established economic order, including central banks.

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Powell has said repeatedly that it’s up to Congress and the White House to tackle such deep-rooted ills as income inequality and racial disparities in the labor market.

But he acknowledged this month that the Fed has a role to play, too. “What we can do,” he told lawmakers, “goes back to taking seriously the job you’ve given us, which is maximum employment.”

Economist Laurence Meyer said central bankers rarely talked about the labor market’s effect on minorities or inequality when he was a Fed governor from 1996 to 2002.

Now, officials talk about those topics all the time. And they think they’re having an effect as the stretched labor market draws in workers from the sidelines.

“One could say, ‘Thank the Fed,’” said Meyer, who heads his own Washington-based consulting firm. “At least somebody is doing something about inequality.”


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