MNI 5 Things: Fed's Powell Says Labor Market Can Tighten More

--5 Things We Learned From Chairman Powell's Testimony

By Jean Yung

     WASHINGTON (MNI) - The following are the key points from Federal Reserve

Chair Jay Powell's semiannual monetary policy testimony Thursday to the Senate

Banking Committee: 

     - After analysts characterized as hawkish the line in Powell's opening

statement that the FOMC needs to "strike a balance between avoiding an

overheated economy and bringing PCE price inflation to 2 percent on a sustained

basis," the Fed chair clarified Thursday "there's no evidence that the economy

is currently overheating." By "continuing to gradually raise interest rates over

time," the Fed will keep risks balanced and make sure that doesn't happen.  

     - Powell highlighted a couple of indications of additional slack in the

labor force: about a 1 percentage point lower participation rate among prime-age

workers compared to pre-crisis levels and little evidence of a significant

pick-up in wage growth. "Nothing in that suggests to me that wage inflation is

at a point of acceleration," which means the labor market can tighten further

without causing inflation, he said.

     - He does expect wages to rise, but in the long run, it's a function of

productivity, which is driven by investment in people and research and

development. 

     - Fiscal policy "this year is going to add meaningfully to demand," which

tends to lift inflation and lower the jobless rate, Powell said. But the effect

is hard to quantify and it wouldn't even be the main factor underpinning the

current growth momentum. 

     - The "bigger question" is how much will fiscal policy add to longer run

growth, Powell said, through the productivity channel and the labor supply

channel. "We hope the effects are meaningful there as well," he said. Deficits

are also a problem that gets bigger with time, he said.

--MNI Washington Bureau; +1 202-371-2121; email: jean.yung@marketnews.com

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