Federal Reserve Chairman Jerome Powell said in prepared remarks Tuesday that persistently low interest rates have cut the central banks scope to respond to an economic downturn, adding that increased government spending would be key to keeping the economy afloat.
“This low interest rate environment may limit the ability of central banks to reduce policy interest rates enough to support the economy during a downturn,” Powell said in testimony prepared for a House Financial Services Committee hearing Tuesday. He added that “the current low interest rate environment also means that it would be important for fiscal policy to help support the economy if it weakens.”
The head of the nations central bank called for restraint in federal spending in times of boom to make room for increased expenditures when the economy finally does contract.
“Putting the federal budget on a sustainable path when the economy is strong would help ensure that policymakers have the space to use fiscal policy to assist in stabilizing the economy during a downturn,” Powell said. “A more sustainable federal budget could also support the economys growth over the long term.”
The U.S. economy, which Powell said “appeared resilient to the global headwinds that had intensified last summer,” is in its 11th year of a record-long expansion.
Growth at Moderate Pace and Muted Inflation
The Fed Chairman said that while the economy grew at a moderate pace and the labor market strengthened over the second half of last year, inflation remained below the Federal Open Market Committees (FOMC) symmetric 2 percent objective.
After the FOMCs most recent rate-setting meeting in late January, during which members ruled to keep the Federal Funds rate unchanged, Powell expressed concern about inflation running too cool.
“While low and stable inflation is certainly a good thing, inflation that runs persistently below our objective can lead to an unhealthy dynamic in which longer-term inflation expectations drift down, pulling actual inflation even lower,” he said at a press conference (pdf) on Jan. 29.
Powell said in Tuesdays remarks that over the 12 months through December 2019, total Personal Consumption Expenditures (PCE) inflation was 1.6 percent, while core inflation, which does not count food and energy prices due to their volatility, also stood at 1.6 percent.
Another inflation gauge the Fed uses to inform its rate-setting decisions is market-based inflation expectations. A chart provided by Nick Reece, Senior Financial Analyst and Portfolio Manager at Merk Investments, shows that market participants believe average inflation over the next 10 years will hover around 1.7 percent.
In his remarks, Powell also specified several “important longer-run challenges” that the U.S. economy faces, namely relatively low labor force participation by peRead More – Source