Head Scratcher for Fed’s Powell: the Right Jobless Level

He hopes to hit the sweet spot that keeps inflation, now 1.9%, in check.

Federal Reserve Chairman Jerome Powell is wrestling with just how low joblessness can go before risking bad inflation, a topic that has many economists puzzled too. He isn’t sure what the answer is.


That’s an important question because the level of unemployment—now 3.8%—is classically a factor in fueling inflation. And high inflation is a beast that the Fed is tasked to contain. Last week, the Fed hiked short-term interest rates for the seventh time since late 2015 in a bid to, among other things, contain any unruly inflationary climb.

The so-called “natural rate” for unemployment is a number that the economics profession has found to be elusive. At that point, inflation would in theory be stable. “Research on this topic is ambiguous,” Powell told a European Central Bank forum in Portugal on Wednesday.

The current jobless rate is the lowest since April 2000. Many analysts expect it could end up at 3.5% in coming months, he said, “and remain there for an extended period.” If so, that would presumably entail higher pay, as employers bid for ever-scarcer workers, a situation that could escalate inflation.

In fact, unemployment was in the mid-3s in the 1960s, when the seeds for hyper-inflation were planted, bursting into malignant flower in the following decade.

Powell, in his address, said that conditions are different today: For one thing, more Americans are college grads, and “highly educated people are less likely to be unemployed.”

Plus, the current Fed is much better at policing inflation, he contended. Another important difference from the 1960s, he went on, “is that inflation has been low and stable for an extended period, which has better anchored inflation expectations.”

As of May, inflation is running at just below the Fed’s preferred level, 2%. Its favorite inflation gauge, the core personal consumption expenditures index, sits at 1.9%, while the headline rate including energy and food prices is 2%. For some time, inflation has run below 2%, and only now is nudging up slightly.

One reason is wage pressures, which Fed officials in their recent meeting minutes described as “moderate” for the time being. Powell should hope that trend continues.

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