The Fed’s New Message: The Economy Can Get a Lot Better for Workers

on Jul11
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Sometimes, ideas can bounce around the intellectual fringes for years before eventually being embraced by the powerful. On Wednesday you could watch it happen in real time, on cable television.

In congressional testimony, the Federal Reserve chair, Jerome Powell, argued that despite the low unemployment rate, the job market was not yet in an all-out boom and that there was room for further improvement without worrying too much about inflation. He even hinted that American workers were due for some catch-up growth in their compensation — after years in which their pay fell as a share of the economy.

It was implicitly a rejection of what had been a consensus view among leaders of the central bank as recently as last year: that the economy had already achieved, or was quite near to, full employment, and therefore that the Fed needed to raise interest rates to prevent inflation.

Consider some of his remarks during his appearance Wednesday before the House Financial Services Committee.

“We don’t have any basis or any evidence for calling this a hot labor market,” Mr. Powell said. “We haven’t seen wages moving up as sharply as they have in the past.”

“To call something hot, you need to see some heat,” he added, as pithy a statement of economic conditions as you’ll hear from a Fed chief.

Representative Alexandria Ocasio-Cortez, Democrat of New York, later asked, “Do you think it’s possible that the Fed’s estimates of the lowest sustainable unemployment rate may have been too high?”

“Absolutely,” Mr. Powell replied, adding that the Phillips curve, the statistical relationship between low joblessness and higher inflation that has been central to Fed policymaking for decades, is showing itself as but a “faint heartbeat.”

He repeatedly noted evidence that the low jobless rate had led employers to be more willing to hire less qualified workers and spend money training them — a phenomenon with big potential longer-term benefits for both those people and the economy as a whole.

So what has changed? The simplest answer is: the data.

It may have been plausible two or three years ago to think it was only a matter of time before a tight job market translated into more rapidly rising compensation for workers, and, in turn, broader inflation. But it hasn’t happened, or at least not remotely to the degree that those models predicted.

It probably also helps that the Fed is now under pressure, from both conservatives and liberals, to increase economic growth. That gives Mr. Powell room to speak of improving conditions for workers without coming across as partisan.

Trump administration officials, particularly the National Economic Council chief, Larry Kudlow, have argued that there is no reason to think a stronger job market will stoke inflation. And the president has criticized Mr. Powell and the Fed for last year’s interest rate increases.

The shift also comes after years in which a handful of voices in the relative wilderness, both inside and outside the central bank, have been building the intellectual case for the view that Mr. Powell embraced Wednesday.

Internally, the Minneapolis Fed president, Neel Kashkari, has made arguments along these lines for years.

Outside the central bank, the activist group Fed Up has contended since its formation in 2014 that the economy was not as close to health as many Fed officials assumed, and that the Fed should forestall interest rate increases until there was more widespread prosperity.

A range of economists has also made these arguments, though often not the boldface names of the profession, but younger academics less tethered to an orthodoxy that dates back decades.

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