Powell Sees Muted Inflation Risk in ‘Extraordinary’ Economy

(Bloomberg) -- Federal Reserve Chairman Jerome Powell welcomed recent increases in Americans’ wages while expressing confidence that low unemployment won’t spur a takeoff in prices that would force him to hike interest rates aggressively.

“The rise in wages is broadly consistent with observed rates of price inflation and labor productivity growth and therefore does not point to an overheating labor market,” Powell said in a speech Tuesday in Boston. “Further, higher wage growth alone need not be inflationary.”

Powell said he expects to stick with the central bank’s current path of gradual interest-rate hikes while monitoring a set of risks presented by the current environment of very low unemployment and low inflation.

“This historically rare pairing of steady, low inflation and very low unemployment is testament to the fact that we remain in extraordinary times,” he said. “Our ongoing policy of gradual interest rate normalization reflects our efforts to balance the inevitable risks that come with extraordinary times, so as to extend the current expansion, while maintaining maximum employment and low and stable inflation.”

Hours before Powell spoke, Amazon.com Inc. announced plans to raise its minimum U.S. hourly wage to $15 effective Nov. 1, applying to more than 350,000 full-time and seasonal workers in the country. That followed moves by other large retailers, including Target Corp. and Costco Wholesale Corp., to boost pay.

A government report on Friday may show average hourly earnings in September rose 2.8 percent from a year earlier after a 2.9 percent gain the previous month that was the biggest jump since 2009. Powell cited this figure among four main wage indicators he watches, all of which he noted are clustered near 3 percent.

Prevent Overheating

Powell is aiming to extend the second-longest U.S. economic expansion on record by moving interest rates up just quickly enough to prevent overheating, but not so rapidly that it chokes off growth. He spoke less than a week after the U.S. central bank lifted rates for a third time this year and officials affirmed projections for four more hikes by the end of 2019.

Repeating a point he made in an August speech in Jackson Hole, Wyoming, Powell said he would take more seriously any sign that inflation expectations were becoming unanchored.

“Our course is clear: Resolutely conduct policy consistent with the FOMC’s symmetric 2 percent inflation objective, and stand ready to act with authority if expectations drift materially up or down,” he said, referring to the policy-making Federal Open Market Committee.

Responding to questions on stage after the speech, Powell said he didn’t yet see any sign that new trade barriers were causing inflation to rise.

“Tariffs could increase prices,” he said. “Then the question is, is it just a price-level increase or does it actually stoke higher inflation. We don’t see that in the data,” adding that it’s probably early to be seeing effects from trade policy.

Powell agreed that concerns over global growth had increased in the past year, but didn’t signal an alarm.

‘Reasonably Positive’

“As you look around the world you still see a reasonably positive picture, maybe slightly less positive this year,” he said in response to questions. “You see a slowdown in the advanced economies and you see really just a handful of emerging-market countries experiencing significant turmoil.”

“Growth is still healthy but it may be under a little pressure,” he said.

Powell didn’t address the ongoing debate inside and outside the Fed over how high rates should go in this hiking cycle. He did imply that even a more substantial rise in inflation wouldn’t necessarily be an issue.

“Our best estimates, however, suggest that so long as inflation expectations remain anchored, a modest steepening of the Phillips curve would be unlikely to cause a significant rise in inflation or demand a disruptive policy tightening,” he said, referring to the long-understood relationship between unemployment and inflation.

--With assistance from Rich Miller.

To contact the reporters on this story: Christopher Condon in Washington at ccondon4@bloomberg.net;Jeanna Smialek in New York at jsmialek1@bloomberg.net

To contact the editors responsible for this story: Brendan Murray at brmurray@bloomberg.net, Scott Lanman

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