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Friday February 21st, 2020 10:45AM

Powell: Solid economy but tame inflation allows low rates

By The Associated Press
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Federal Reserve Chairman Jerome Powell on Monday sketched an optimistic view of the economy but signaled that continued low inflation means higher interest rates won’t likely be necessary anytime soon.

Powell said that even with unemployment near a 50-year low of 3.6%, there’s still “plenty of room” for wages to rise and for more Americans to join the workforce. He noted that annual inflation remains below the Fed’s 2% target level.

The Fed chairman made his remarks in a speech to the Greater Providence (Rhode Island) Chamber of Commerce.

The central bank has cut its benchmark short-term rate three times this year to a range of just 1.5% to 1.75%. Powell signaled last month that the Fed will now likely remain on hold unless the economy noticeably worsens.

Powell said the three rate cuts have helped spur more home purchases, which have contributed to the economy’s ongoing expansion, now in its 11th year, the longest on record.

That long-running growth is benefiting many less-advantaged workers who had mostly seen meager hiring and wage gains in the first half of the recovery, Powell said. Continuing to spread such opportunities is a key reason to sustain growth, he added.

“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,” Powell said. “But ... 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.”

Powell’s buoyant outlook followed a visit earlier Monday to a workforce development program in East Hartford, Connecticut, where he heard from residents who had completed training programs and gotten higher-paying jobs.

Still, the Fed Chair highlighted a challenge for the central bank: Inflation has been stuck below the Fed’s 2% target for most of the past seven years. While most people prefer limited price increases, the Fed worries that persistently low inflation can become ingrained and force the Fed to keep interest rates low permanently, limiting its ability to combat future downturns.

“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,” Powell said.

Powell also acknowledged that what the Fed calls the “neutral” interest rate, which neither stimulates nor inhibits growth, has fallen for the past seven years.

That “provided another reason why a somewhat lower setting of our policy interest rate might be appropriate,” Powell said.

Rhode Island’s Gov. Gina Raimondo, head of the Democratic governors’ association, told Powell at the Chamber of Commerce dinner, “I think you’re doing an extraordinary job,” especially under difficult circumstances.

“Of course, everybody has an opinion about what you should be doing,” she said, a reference to President Donald Trump’s repeated attacks on Powell.

___

AP Writer Matt O’Brien contributed to this report from Providence, Rhode Island.

  • Associated Categories: Associated Press (AP), AP Business, AP Business - Economy, AP Business - Industries, AP Business - Financial Services
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