Federal Reserve Chairman Jerome Powell testifies during a House Financial Services Committee hearing on “Monetary Policy and the State of the Economy” in Washington, July 10, 2019.
Erin Scott | Reuters
Federal Reserve Chairman Jerome Powell said the relationship between unemployment and inflation has collapsed.
“The relationship between the slack in the economy or unemployment and inflation was a strong one fifty years ago … and has gone away,” Powell said on Thursday during his testimony in front of the Senate Banking Committee. “At least twenty years ago, that period was over and the relationship between unemployment and inflation became weak. And it’s become weaker and weaker and weaker.”
“In additional to that, we are learning that the neutral interest rate is lower than we had thought and … the natural rate of unemployment rate is lower than we thought. So monetary policy hasn’t been as accommondative as we had thought,” Powell said.
Under the Fed’s dual mandate of full employment and price stability, the jobless rate has been historically low, inching up to 3.7% in June from 3.6% in May, which was the lowest since 1969.
“At the end of the day, there has to be a connection because low employment will drive wages up and ultimately higher wages will drive inflation, but we haven’t reached that point. In many cases, that connection between the two is quote small these days,” the Fed chief said.
Powell said on Wednesday the Fed will “act as appropriate” to sustain expansion as “crosscurrents” are weighing on the economic outlook. He noted business investments across the U.S. have slowed “notably” recently.
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