Federal Reserve Chair Jerome Powell wrapped up his semiannual congressional testimony yesterday with another explicit signal that monetary policy will remain highly accommodative for some time to come. Powell noted in his prepared remarks that the economy is a long way from the Fed’s goals and answered repeated questions on inflation by stressing that any forthcoming surge is likely to be transitory. He added that “it may take more than three years” for annual price increases to sustainably hit the 2.0 percent target.
Perhaps more tellingly, Powell continued to emphasize the substantial slack in the labor market and made it clear once again that policymakers won’t be satisfied until even the broadest measures of unemployment have been dramatically reduced. In fact, he referenced the employment/population ratio, a metric that has been in structural decline for two decades, as a benchmark against which the Fed is measuring progress toward its labor market goal. These comments echo those from the post-FOMC meeting press conference last month, in which Powell said that maximum employment will remain elusive as long as there are pockets of joblessness. This is a tautology, of course, but it hints that policymakers will be able to justify a dovish stance against virtually any labor market backdrop given that there are patches of unemployment in even the most robust of economies (the broad U-6 jobless rate, for example, has never fallen below 6.8 percent in its nearly three-decade history). This is also very much in line with the Fed’s official forecast, which foresees no rate increases until at least 2024 despite an anticipated 3.7 percent average U-3 unemployment rate in the fourth quarter of 2023.
The upshot is that a lasting inflation surprise is shaping up to be the only impediment to continued aggressive monetary stimulus. Absent such a shock, the longer-term risks for the economy and asset prices continue to be to the upside.
Originally published by Nationwide, 2/25/21