Fed chair signals gradual rate hikes in tame inflation era

WASHINGTON — The U.S. Federal Reserve will likely keep raising short-term interest rates at only a gradual pace, Fed chair Jerome Powell said Wednesday, partly because there are few signs, so far, that the ultra-low U.S. unemployment rate is pushing up inflation.

In a speech in Portugal, Powell said that with the unemployment rate at an 18-year low of 3.8 percent and inflation near the Fed's 2 percent target, the case for continued gradual increases in rates "is strong."

Still, Powell suggested that the Fed is unlikely to accelerate its increases out of concern that the low unemployment rate will lead to accelerated inflation. An ultra-low jobless rate in the past has at times pushed up inflation as companies raise prices so they can pay more to keep workers.

But Powell noted that the sharp drop in unemployment since the Great Reccession ended in 2009 has occurred "without much apparent reaction from inflation."

Powell's speech underscores that the Fed is struggling with the question of how low the unemployment rate can go before it becomes unsustainable and leads to much faster price increases. At a press conference last week, Powell confessed that the relatively slow wage gains in the U.S., even as the unemployment is so low, is "a puzzle."

Powell's remarks at a central banking forum come just a week after the Fed raised its benchmark short-term rate for the second time this year. Fed policymakers signaled they will likely hike rates twice more this year. That was an increase from previous projections that they would do so only three times.

Powell acknowledged that in the late 1960s, when the unemployment rate fell below 4 percent for roughly four years, inflation eventually hit 5 percent. That forced the Fed to raise interest rates and led to a mild recession.

But he said that period provides little guidance to what the Fed should do now. Changes in the U.S. economy make such an outcome less likely now, Powell said. American workers are more likely to be college graduates than in the late 1960s, and more-educated workers tend to have lower unemployment.

And inflation has been very low for nearly two decades, leading Americans to expect inflation to stay low, another change from the late 1960s, Powell said. Inflation expectations can be self-fulfilling: If workers assume price increases will be modest, then they are less likely to push for higher wages, while businesses are more likely to keep prices in check.

"In my view the historical comparison does not shed as much light as we might have hoped," Powell said.

Powell also acknowledged that long periods of steady growth can cause bubbles in stocks or other assets, which can also cause downturns, such as the rampant increase in housing prices before the 2008-2009 Great Recession.

But he said there are few signs of that occurring now.

"While some asset prices are high by historical standards, I do not see broad signs of excessive borrowing," he said.

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