BOSTON, Oct 2 (Reuters) - U.S. Federal Reserve Chairman Jerome Powell on Tuesday hailed a “remarkably positive outlook” for the U.S. 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 percent unemployment expected through at least two more years, and inflation that will remain modest even as wages rise, would be “unique in modern U.S. 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 Fed’s 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 to 2009 economic 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 textbook “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 on Tuesday argue that the economy has become, in effect, immunized 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 emerging risks that might allow inflationary psychology to take hold again.
So far, he said, despite tight job markets, risks of global tariff wars, and a pickup in wages, that is not the case.
“I am glad to be able to stand here and say that the economy is strong, unemployment is near 50-year lows, and inflation is roughly at our 2 percent objective,” Powell said. “The baseline outlook for forecasters inside and outside the Fed is for more of the same.” (Reporting by Howard Schneider and Jonathan Spicer; Editing by Andrea Ricci)