Federal Reserve Chair Jerome H. Powell testified Wednesday before the House Financial Services Committee on the Fed’s thinking about the state of the economy. The hearing — the semiannual Monetary Policy Report to Congress (Powell repeats his testimony in the Senate on Thursday) — is often a pretty staid affair. The chair tries not to say anything that might roil markets, while the markets look for hints on the central bank’s plans for the benchmark interest rate it controls.
In that regard, the big news out of the hearing was Powell’s signaling that the Fed is likely to respond to growing economic head winds by cutting the interest rate at its meeting later this month. Markets responded positively to the news, with the S&P 500 spiking above 3,000 for the first time, before falling back a bit in later afternoon trading.
But while interest rates and equity markets get a lot of attention, they’re not the most relevant results for the vast majority of working-age people who depend on their paychecks for a living, not their stock portfolios. Indeed, the Fed’s own data show that 72 percent of financial assets are held by the top 10 percent, compared with 2 percent held by the bottom half.
With that stark inequality in mind, here’s the more germane news, from the perspective of working families, to come out of Powell’s testimony:
First, Powell said: “The benefits of a strong job market have been more widely shared in recent years. Indeed, wage gains have been greater for lower-skilled workers. That said, individuals in some demographic groups and in certain parts of the country continue to face challenges. For example, unemployment rates for African Americans and Hispanics remain well above the rates for whites and Asians.”
These comments are important on numerous levels. Most broadly, by diverging from the usual commentary about the overall, macro economy and getting into a discussion the specific people and places economically left behind, Powell challenged the stance, often touted by conservatives but quite wrong in my view, of those who argue that addressing inequality or distributional outcomes is not the purview of the Fed.
Powell is disagreeing with such scolds, as he should. (He also mentioned “low levels of upward mobility for lower-income families.”) The Fed is one of the most powerful economic institutions in the world and thus has an obligation to monitor and factor into its actions one of the most important economic phenomena of our time: the rise of economic disparities.
Second, by explicitly noting the differences in the unemployment rate, depending on race, Powell is acknowledging another critical and persistent dimension contributing to income and wealth inequality. Here again, while few Fed chairs have raised this issue, some of the Fed’s own research explains its importance: “The [racial unemployment] gap, unsurprisingly, is sensitive to full employment, as black workers are disproportionately helped by tight labor markets and lastingly hurt by weak ones.”
Third, speaking of the job market, where unemployment, at 3.7 percent, is near a 50-year low, Powell was remarkably dovish: “We don’t have any basis, or any evidence, for calling this a hot labor market. To call something hot, you need to see some heat, and while we hear lots of reports of companies having a hard time finding qualified labor, nonetheless, we don’t really see wages really responding.”
To understand why this statement is so important, you must know a bit of monetary policy history. For many decades, central banks across the globe, including the Fed, believed the lowest unemployment rate consistent with stable prices — the “natural rate” of unemployment — was well above today’s level. Today, the rate is generally estimated to be around 4.5 percent; 10 years ago, it was thought to be around 5 percent; 30 years ago, around 6 percent. Thus, whenever the job market threatened to heat up, they slammed the growth brakes by raising their benchmark interest rate. This proclivity was a disaster for many working people who depend on a persistently tight labor market to catch a break.
Yet in recent years, much to the credit of Powell’s predecessor, Janet L. Yellen, the Fed has become more data-dependent and less knee-jerk. Practically speaking, that meant it would spend less time adhering to theoretical estimates of the natural rate and more time evaluating wage and price data. Here we have a clear statement from Powell that, absent wage pressures, the labor market isn’t all that hot, even at historically low unemployment.
Under questioning from Rep. Alexandria Ocasio-Cortez (D-N.Y.), Powell elaborated: “I think we really have learned that the economy can sustain much lower unemployment than we thought without troubling levels of inflation. I would look at today’s level of unemployment as well within the range of potential estimates, plausible estimates of what the [natural rate] is.” That’s Fed-speak for we can do better on employment, without risking inflation — a statement that augurs well for vulnerable workers.
A final example of this point speaks to those facing steep labor-market-entry barriers — potential employees who’d barely get a look in a less-tight labor market. Regarding this group, Powell said:
“We are hearing a lot from folks who live and work in low- and moderate-income communities that there are work opportunities and there are companies that are coming in and really want workers, and they’re going to look through some of the problematic things people may have had in their lives and hire them anyway. We think that’s really healthy and in a tight labor market, if you have a tight labor market that lasts for a really long time, that’s what you’re going to get.”
Yes, equity markets heard news Wednesday that made them rejoice. But it’s in low-wage workers’ paychecks, in the heretofore left-behind parts of our nation, in the neighborhoods where it almost always feels like a recession, that Fed policy matters the most. And to have a Fed chair paying close attention to — perhaps even pulling for — them is an unequivocal blessing.