At an ECB conference in Portugal, Powell indicated that “concerns seem to be rising” about trade policy (June 20). He repeated that, “If you ask is it in the forecast yet, is it in the outlook, the answer is no. And you don’t see it in the performance of the economy.” However, he noted that “for the first time we are hearing about decisions to postpone investment, postpone hiring, postpone making decisions. That is a new thing.” In his speech at the same conference, Powell echoed some of the same themes that he outlined in his June FOMC press conference. He concluded that the argument for continuing with a gradual pace remains “strong and broadly supported.”
He focused on the implications of the unemployment rate falling to fall to levels that were last seen in the 1960s, concluding, “Unfortunately, with the passage of a half-century and important changes in the structure of our economy and in central bank practices, in my view the historical comparison does not shed as much light as we might have hoped.” He noted that the natural rate of unemployment is widely thought to be much lower today, in part because education levels are higher and “more highly educated people are less likely to be unemployed.” He also pointed out that inflation expectations are better anchored, and that “Today policymakers have a greater appreciation of the role expectations play in inflation dynamics and a clearer commitment to maintaining low and stable inflation.”
Turning to the implications today, he again emphasized the great uncertainty surrounding estimates of the natural rate of unemployment: “Natural rate estimates have always been uncertain, and may be even more so now as inflation has become less responsive to the unemployment rate.” He suggested that this flattening of the Phillips curve has likely been caused in part by the anchoring of inflation expectations.
Because the Phillips curve is flatter, the effect on inflation of a substantial undershooting of the NAIRU “might not be large.” However, he noted that “a very tight labor market could lead to larger, nonlinear effects.” He also warned against trying to exploit the flatness of the Phillips curve, because, “If central banks were instead to try to exploit the nonresponsiveness of inflation to low unemployment and push resource utilization significantly and persistently past sustainable levels, the public might begin to question our commitment to low inflation, and expectations could come under upward pressure.”
After discussing the inflation implications of a tight labor market, he drew attention to “the fact that the two most recent U.S. recessions stemmed principally from financial imbalances, not high inflation, highlights the importance of closely monitoring financial conditions.” He warned that “we have often seen confidence become overconfidence and lead to excessive borrowing and risk-taking, leaving the financial system more vulnerable.” Still, he concluded that “Today I see U.S. financial stability vulnerabilities as moderate and broadly in line with their long-run averages.”
Finally, he considered the possibility that a very tight labor market could produce “lasting benefits,” including by bringing people back into the labor force. However, he again stressed that “the historical evidence is sparse and inconclusive.”