Jerome Powell, appearing before the Senate panel weighing his nomination to be Federal Reserve chairman, aligned himself with a more dovish wing of the U.S. central bank that believes the labor market can get even stronger without creating inflation worries.
President Donald Trump’s nominee said the current jobless rate of 4.1 percent is at or below many estimates of full employment, and then pointed to other measures that suggest remaining slack like historically low participation rates.
“There’s no sense of an overheating economy or a particularly tight labor market,” Powell said in response to a question from Senator Jack Reed, a Rhode Island Democrat. “There may be more slack, more people that can come back to work. I think we are looking at an economy that is going to go under 4 percent unemployment.”
His comments suggest he shares current Fed Chair Janet Yellen’s view that there are still pools of potential workers who can be drawn into the labor force, giving the Fed scope to continue its go-slow approach to raising interest rates.
Powell went on to explain that moderate wage growth, and low rates of labor-force participation, particularly among working-age men, provide additional evidence of pockets of remaining labor supply. At the same time, the economy is strong enough to handle the Fed’s policy of gradual rate hikes, possibly including one next month.
“The case for raising interest rates at our next meeting is coming together,” Powell said under questioning by Senator Dean Heller, a Nevada Republican. “Conditions are supportive of doing that.”
The comments come as Fed officials are preparing for their last meeting of the year Dec. 12-13. Financial markets are pricing in about a 93 percent probability of a rate hike at that meeting. What will be critical is how Powell, if confirmed by the Senate, leads the committee on further rate increases in 2018.
U.S. central bankers are increasingly split on the risks facing policy. The unemployment rate is likely to fall lower still, possibly dipping below 4 percent next year as growth picks up. That’s leading some officials to argue that the fundamentals for higher prices are already in play. At the same time, inflation measures have fallen further below the central bank’s 2 percent target this year, extending a miss for most of the past five years.
“He seems to be more data-dependent” than Yellen, said Omair Sharif, senior U.S. economist at Societe Generale in New York. “He seems to be in the camp that says, ‘I am going to wait for the evidence to suggest that we are moving toward our inflation target.”’
Powell said it is important to achieve the target and said he and other members of the committee have been surprised by the softness in prices this year. “One question is -- is it transitory, or are there more fundamental things at work here?” he told the Senate banking panel. “We will have to be guided by the data as it comes in.”