A conversation with a Federal Reserve Governor
After Wednesday’s interest rate hike, Marketplace Host Kai Ryssdal talked with Jay Powell, a member of the Board of Governors of the Federal Reserve about the rationale behind the move and the outlook for the future.
Kai Ryssdal: Do me a favor and help us make sense of the difference between what we’re finding in the reporting out there, which is a lot of people still feel stuck in this economy and with what the FOMC and chair Yellen and you guys in your statement the other day said is a recovering and strong economy. Help me make sense of that.
Jerome Powell: Sure. So the economy has recovered quite a bit since the global financial crisis. And one way to think about it is unemployment. Unemployment was at 10 percent, we lost about 9 million jobs in the financial crisis, which was the worst episode since the Great Depression, the deepest recession since the Great Depression. Since that time we’ve generated 13 million new jobs and unemployment has declined from 10 percent to five percent. So that’s a really material improvement in the state of things. That’s not to say that that’s uniform across different regions of the country, and it’s not to say that every household feels better and there are significant ways in which the economy can continue to improve. Wages have not been increasing as certainly I would like, but it’s a fact that there’s been significant progress and I would hope that people would take our first very small rate increase as a sign that the Federal Reserve has confidence in the state of the economy and in the fact that we’ll continue to make progress.
Ryssdal: Noted that you said very small cause it was, and we have to acknowledge that fact. How does raising rates, though, help the economy get better from here?
Powell: So we kept the short term interest rates at close to zero for seven years. That’s unprecedented. As the economy improves, it will become appropriate for the interest rate to go up to a normal level. We call the process of raising interest rates the normalization process. And so this represents a judgment that we have reached the point at which we can depart from the zero lower bound and begin a gradual process of increasing interest rates. So the reason why you need to do that is that monetary policy — little things like a 25 basis point increase aren’t gonna have a major impact. But over time monetary policy does have a very big impact on the economy and it does so over long periods of time with lags and gaps. So if you so-called “get behind” on monetary policy, you have to raise interest rates too sharply and that can cause a recession. So the right way to go, I think, is to start now with a very small increase and move very gradually to avoid that.
Ryssdal: Chair Yellen has been very clear in her intentions and the FOMC’s intentions about normalization of rates. I wonder, though, whether you all got yourselves backed into a corner where you talked so much about raising rates that finally you had to do it, by gosh.
Powell: That’s not how I see it at all. We want this to be a long, extended recovery and for it to continue for some significant number of more years. And I do think that the right way to do that is, again, to begin a program of very gradual, small rate increases and, by the way, that path will depend very much on the path of the economy. If the economy is weaker, then we’ll know that, and of course we’ll react accordingly.
Ryssdal: Does that mean you guys are ready to go back to the zero lower bound if you have to?
Powell: If you have to, you have to. Yes. It’s not impossible. Monetary policy’s about forecasts. You have to have a forecast of where things are gonna go and you try to set monetary policy for what you see as the likely path of the economy.
Ryssdal: “Gradually” got a lot of attention in Chair Yellen’s press conference the other day. She made great efforts to say, “It’s not gonna be a mechanical thing.” Without using her favorite phrase, which is, “It’s gonna depend on the data,” what are you gonna be looking at to think and to know when it’s okay to start ratcheting things up again?
Powell: Well we do look at a wide range of things. For me, at the top of the list will be continued progress in the labor market and with it continued progress on inflation. Inflation is in below our target. As I mentioned, the labor market has strengthened quite a bit, but I wanna see continued strong job growth. We’ve had three years of very strong job growth. I want to see that continue. And as the labor market tightens, I’d like to see wages increasing, and as the economy tightens, we need to see inflation coming up. Underlying inflation, if you look through the changes in gas prices and import prices is probably running at around one and a half percent. Our goal is two percent, so we’d like to see underlying inflation come up to two percent.
Ryssdal: Now that this first hike is behind you, how hopeful are you to get the Fed out of the spotlight, so that every discussion about the economy isn’t, “Oh my God, what’s the Fed gonna do?”
Powell: Let me say that I’ll be glad to stop talking about the first rate increase. But it’s the case that there’s been too much focus, and it’s understandable I guess, on just this one rate increase. Really what’s important to people is, are employers hiring? Are their kids getting good job opportunities? Are their wages increasing? Are they feeling confident about the future, are they able to afford a home, things like that. And that’s what we’ve tried to focus on, and that’s what the public needs to be focused on. It would be just great to see the Fed get out of the headlines and let people get to more normal considerations.
Produced by Mukta Mohan
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