U.S. policy makers for years sought to avoid what they saw as the Japanese disease of a deflation-wracked, depressed economy. But now Federal Reserve Chairman Jerome Powell seems to be hoping that the U.S. has grown a bit like Japan in one key respect: the jobs market.
In countenancing a fall in unemployment to levels that prevailed in the late 1960’s, Powell is betting that it won’t lead to the wage-price spiral of rapidly rising inflation that characterized that era. Instead, he appears to be counting on an experience a little more akin to present-day Japan, where a jobless rate well below that of America’s hasn’t generated all that much upward pressure on wages or inflation.
“Frankly, I do think there’s a lot to like about low unemployment,” Powell told a press conference on June 13 after the Fed raised interest rates for the second time this year.
The risk is that low U.S. joblessness stokes wage demands and increases inflation to levels that the Fed deems unacceptable, forcing the central bank to jack up interest rates in response. That in turn could jeopardize the nine-year-old economic expansion.
Powell will join Bank of Japan Governor Haruhiko Kuroda, European Central Bank chief Mario Draghi and Reserve Bank of Australia Governor Philip Lowe on a policy panel Wednesday at the ECB’s annual forum in the Portuguese hilltop resort of Sintra. The topic of the conference: “Price and Wage-Setting in Advanced Economies.”
U.S. salaries have picked up some as the labor market has strengthened, though Powell has said he has been surprised that the upturn hasn’t proven stronger given how far unemployment has fallen. At 3.8 percent in May, the jobless rate is well down from its post-crisis peak of 10 percent in 2009 and is below the 4.5 percent level policy makers reckon is sustainable in the long-run.
“It’s a bit of a puzzle,” the Fed chief said, while adding that he expects wages to go up as the labor market tightens.
U.S. central bank officials see unemployment sinking to 3.5 percent by the end of 2019, according to their median forecast released on June 13. Yet Powell said he’s sticking with his “patient” approach of gradually increasing interest rates even as inflation is projected to rise a smidgen above the Fed’s 2 percent target.
In Japan, joblessness is lower still, at 2.5 percent in April, just a tick above the 25-year low set in January. There were 1.59 job openings for every job applicant in April, the highest level since 1974.
Yet wage increases have been modest at best and inflation has remained well below the BOJ’s 2 percent target. Companies remain cautious about raising base salaries and opt to reward employees with bonuses as they are easier to cut in a downturn.