For release on delivery
7:00 p.m. EST
November 25, 2019
Building on the Gains from the Long Expansion
Remarks by
Jerome H. Powell
Chair
Board of Governors of the Federal Reserve System
at
Annual Meeting of the Greater Providence Chamber of Commerce
Providence, Rhode Island
November 25, 2019
Over the past year, my colleagues and I on the Federal Open Market Committee
(FOMC) have been conducting a first-ever public review of how we make monetary
policy. As part of that review, we held Fed Listens events around the country where
representatives from a wide range of groups have been telling us how the economy is
working for them and the people they represent and how the Federal Reserve might better
promote the goals Congress has set for us: maximum employment and price stability.
We have heard two messages loud and clear. First, as this expansion continues into its
11th year-the longest in U.S. history-economic conditions are generally good.
Second, the benefits of the long expansion are only now reaching many communities, and
there is plenty of room to build on the impressive gains achieved so far.
These themes show through in many ways in official statistics. For example,
more than a decade of steady advances has pushed the jobless rate near a 50-year low,
where it has remained for well over a year. But the wealth of middle-income families-
savings, home equity, and other assets-has only recently surpassed levels seen before
the Great Recession, and the wealth of people with lower incomes, while growing, has
yet to fully recover.1
Fortunately, the outlook for further progress is good: Forecasters are generally
predicting continued growth, a strong job market, and inflation near 2 percent. Tonight I
will begin by discussing the Fed's policy actions over the past year to support the
favorable outlook. Then I will turn to two important opportunities for further gains from
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this expansion: maintaining a stable and reliable pace of 2 percent inflation and
spreading the benefits of employment more widely.
Monetary Policy and the Economy in 2019
We started 2019 with a favorable outlook, and over the year the outlook has
changed only modestly in the eyes of many forecasters (figure 1). For example, in the
Survey of Professional Forecasters, the forecast for inflation is a bit lower, but the
unemployment forecast is unchanged and the forecast for gross domestic product (GDP)
is nearly unchanged.2 The key to the ongoing favorable outlook is household spending,
which represents about 70 percent of the economy and continues to be strong, supported
by the healthy job market, rising incomes, and solid consumer confidence.
While events of the year have not much changed the outlook, the process of
getting from there to here has been far from dull. I will describe how we grappled with
incoming information and made important monetary policy changes through the year to
help keep the favorable outlook on track.
As the year began, growth appeared robust, but the economy faced some risks
flowing mainly from weakening global economic growth and trade developments.
Foreign growth, which slipped in the second half of last year, slid further as 2019
progressed. While weaker foreign growth does not necessarily translate into similar
weakness here, it does hurt our exporters and presents a risk that the weakness may
spread more broadly. At the same time, business contacts around the country have been
telling us that trade-related uncertainties are weighing on their decisions. These global
developments have been holding back overall economic growth. Manufacturing output,
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which had only recently surpassed its level before the Great Recession, has declined this
year and is again below its pre-recession peak. Business investment has also weakened.
In addition, inflation pressures proved unexpectedly muted this year. After
remaining close to our symmetric 2 percent objective for much of last year, inflation is
now running below 2 percent. Some of the softness in overall inflation is the result of a
fall in oil prices and should not affect inflation going forward. But core inflation-which
omits volatile food and energy prices-is also running somewhat below 2 percent.
The main themes of our deliberations this year have been a continuing favorable
outlook founded on strength in the household sector, with a few yellow flags including
muted inflation and weakness in manufacturing. In addition, global growth and trade
have presented ongoing risks and uncertainties. We also faced some less prominent
factors that always confront policymakers. Specifically, we never have a crystal clear
real-time picture of how the economy is performing. In addition, the precise timing and
size of the effects of our policy decisions cannot be known in real time.
In August, the Bureau of Labor Statistics previewed a likely revision to its count
of payroll job creation for the 12 months ended March 2019. The preview indicated that
job gains over that period were about half a million lower than previously reported. On a
monthly basis, job gains were likely about 170,000 per month, rather than 210,000.
While this news did not dramatically alter our outlook, it pointed to an economy with
somewhat less momentum than we had thought.3
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Uncertainty about how our policies are affecting the economy also entered our
discussions. As you know, we set our policy interest rate to achieve our goals of
maximum employment and stable prices. In doing so, we often refer to certain
benchmarks. One of these is the interest rate that would be neutral-neither restraining
the economy nor pushing it upward. We call that rate "r*" (pronounced "r star"). A
policy rate above r* would tend to restrain economic activity, while a setting below r*
would tend to speed up the economy. A second benchmark is the natural rate of
unemployment, which is the lowest rate of unemployment that would not create upward
pressure on inflation. We call that rate "u*" (pronounced "u star"). You can think of r*
and u* as two of the main stars by which we navigate. In an ideal world, policymakers
could rely on these stars like mariners before the advent of GPS. But, unlike celestial
stars on a clear night, we cannot directly observe these stars, and their values change in
ways that are difficult to track in real time. Standard estimates of r* and u* made by
policymakers and other analysts have been falling since 2012 (figure 2). Since the end of
last year, incoming data-especially muted inflation data-prompted analysts inside and
outside the Fed to again revise down their estimates of r* and u*.4 Taken at face value, a
lower r* would suggest that monetary policy is providing somewhat less support for
employment and inflation than previously believed, and the fall in u* would suggest that
the labor market was less tight than believed.5 Both could help explain the weakness in
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inflation. As with the revised jobs data, these revised estimates of the stars were not a
game changer for policy, but they provided another reason why a somewhat lower setting
of our policy interest rate might be appropriate.
How did we add up all of these considerations? To help keep the U.S. economy
strong in the face of global developments and to provide some insurance against ongoing
risks, we progressively eased the stance of monetary policy over the course of the year.
First, we signaled that increases in our short-term interest rate were unlikely. Then, from
July to October, we reduced the target range for the federal funds rate by 3/4 percentage
point. The full effects of these monetary policy actions will be felt over time, but we
believe they are already helping to support consumer and business sentiment and
boosting spending in interest-sensitive sectors, such as housing and consumer durable
goods.
We see the current stance of monetary policy as likely to remain appropriate as
long as incoming information about the economy remains broadly consistent with our
outlook of moderate economic growth, a strong labor market, and inflation near our
symmetric 2 percent objective. Looking ahead, we will be monitoring the effects of our
policy actions, along with other information bearing on the outlook, as we assess the
appropriate path of the target range for the federal funds rate. Of course, if developments
emerge that cause a material reassessment of our outlook, we would respond accordingly.
Policy is not on a preset course.
I will wrap up with two areas where we have an opportunity to build on our gains.
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A Sustained Return of Inflation to 2 percent
For many years as the economy recovered from the Great Recession, inflation
averaged around 1.5 percent-below our 2 percent objective (figure 3). We had long
expected that inflation would gradually rise as the expansion continued, and, as I noted,
both overall and core inflation ran at rates consistent with our goal for much of 2018. But
this year, inflation is again running below 2 percent.
It is reasonable to ask why inflation running somewhat below 2 percent is a big
deal. We have heard a lot about inflation at our Fed Listens events. People are
concerned about the rising cost of medical care, of housing, and of college, but nobody
seems to be complaining about overall inflation running below 2 percent. Even central
bankers are not concerned about any particular minor fluctuation in inflation.
Around the world, however, we have seen that inflation running persistently
below target can lead to an unhealthy dynamic in which inflation expectations drift down,
pulling actual inflation further down. Lower inflation can, in turn, pull interest rates to
ever-lower levels. The experience of Japan, and now the euro area, suggests that this
dynamic is very difficult to reverse, and once under way, it can make it harder for a
central bank to support its economy by further lowering interest rates. That is why it is
essential that we at the Fed use our tools to make sure that we do not permit an unhealthy
downward drift in inflation expectations and inflation. We are strongly committed to
symmetrically and sustainably achieving our 2 percent inflation objective so that in
making long-term plans, households and businesses can reasonably expect 2 percent
inflation over time.
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Spreading the Benefits of Employment
Many people at our Fed Listens events have told us that this long expansion is
now benefiting low- and middle-income communities to a degree that has not been felt
for many years. We have heard about companies, communities, and schools working
together to help employees build skills-and of employers working creatively to structure
jobs so that employees can do their jobs while coping with the demands of family and life
beyond the workplace. We have heard that many people who in the past struggled to stay
in the workforce are now working and adding new and better chapters to their lives.
These stories show clearly in the job market data. Employment gains have been broad
based across all racial and ethnic groups and all levels of educational attainment as well
as among people with disabilities (figure 4).
The strong labor market is also encouraging more people in their prime working
years-ages 25 to 54-to rejoin or remain in the labor force, meaning that they either
have a job or are actively looking for one. This is a welcome development. For several
decades up until the mid-1990s, the share of prime-age people in the labor force rose, as
an influx of women more than offset some decline in male participation. In the mid-
1990s, however, prime-age participation began to fall, and the drop-off became steeper in
the Great Recession and the early years of the recovery (figure 5). Between 2007 and
2013, falling participation by both men and women contributed to a 2 percentage point
overall decline. Our falling participation rate stands out among advanced economies.
While the United States was roughly in the middle of the pack among 32 economies as of
1995, in 2018 we ranked near the bottom (figure 6). Fortunately, in the strong job market
since 2014, prime-age participation has been staging a comeback. So far, we have made
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up more than half the loss in the Great Recession, which translates to almost 2 million
more people in the labor force. But prime age participation could be still higher.
Income growth of low- and middle-income households has shown a pattern
similar to that of participation, with two decades of disappointing news turning to better
news during the past few years. According to Census data, inflation-adjusted incomes for
the lowest 20 percent of households declined slightly over the two decades through 2014,
and income for the middle 20 percent rose only modestly. Since then, incomes for these
groups have risen more rapidly, as wage growth has picked up-and picked up most for
the lower-paying jobs (figure 7).
Recent years' data paint a hopeful picture of more people in their prime years in
the workforce and wages rising for low- and middle-income workers. But as the people
at our Fed Listens events emphasized, this is just a start: There is still plenty of room for
building on these gains. The Fed can play a role in this effort by steadfastly pursuing our
goals of maximum employment and price stability. The research literature suggests a
variety of policies, beyond the scope of monetary policy, that could spur further progress
by better preparing people to meet the challenges of technological innovation and global
competition and by supporting and rewarding labor force participation.6 These policies
could bring immense benefits both to the lives of workers and families directly affected
and to the strength of the economy overall. Of course, the task of evaluating the costs
and benefits of these policies falls to our elected representatives.
- 9 -
Conclusion
Monetary policy is now well positioned to support a strong labor market and
return inflation decisively to our symmetric 2 percent objective. If the outlook changes
materially, policy will change as well. At this point in the long expansion, I see the glass
as much more than half full. With the right policies, we can fill it further, building on the
gains so far and spreading the benefits more broadly to all Americans.
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