Fed Chief Jerome Powell recently offered his opinion on the economy in a rare broadcast interview. It’s not unheard of for a Fed Chief to do a media interview, but this one comes at a time when there’s been much criticism about the Federal Reserve’s decision to hike short term interest rates. He reiterated in his interview, that rate hikes are on hold. He also spoke about the health of the economy, true unemployment numbers, and potential risks the Fed is monitoring. (1)
The Federal Reserve commands attention every month when board members meet to discuss monetary policy. They touch on many issues, but their decisions on short-term interest rates probably get the most public attention. Those are the rates that banks charge each other for short-term lending. They don’t affect mortgage rates directly, but they do have an impact on interest rates for other kinds of short-term debt, like credit cards.
Economy in “A Good Place”
Fed Chief Powell addressed this first, in an interview on 60 minutes. He gave an overall “thumbs up” to the economy saying it’s “in a good place” with a favorable outlook and muted inflation. He said, the board believes the policy rate “is in an appropriate place” and they would exercise “patience” in determining any future rate hikes.
He explained “patience” as not being in a hurry to make any changes to the current interest rate policy as they monitor economic conditions. So, the good news is that interest rates will remain where they are as the board evaluates the economy. Among the issues the Federal Reserve governors are watching is slower economic growth around the globe that could affect the U.S.
Outlook is Favorable
He said, 2018 was a strong year with a little more than 3% growth, high levels of employment, increasing wages, and solid confidence levels among consumers and businesses. He said, “The outlook for the U.S. economy is favorable” and the “principal risk to our economy now seem to be coming from slower growth in China and Europe and also risk events such as Brexit.”
Powell is not troubled by a higher number of defaults on things like car loans. He says, there are more defaults because there have been more car sales but the auto default rate hasn’t really changed. He says, defaults show that some people are struggling, and that’s something board members monitor. They are also keeping an eye on retail sales, which were surprisingly low in December.
But, remember, we also had a 35-day partial government shutdown that took us from December 22nd through January 25th. Some economists say that took a bite out of our GDP. Powell says, there’s some evidence that spending has now popped back up, but he doesn’t expect to see a growth rate much above 3%. He said, it’s possible the U.S. economy will hit a 4% growth rate at times, but it will be more difficult to do because of an aging workforce. He’s talking about all those retirees who are leaving the workforce faster than we are replacing them.
Labor Participation Rate
One topic of particular interest that the Fed Chief commented on is our “labor participation rate.” We always hear about the unemployment rate which is currently at 4%. That’s a 50-year low and a very good number, but the “labor participation rate” is also significant because it highlights the number of people in their prime working years who are not in the labor force, at all.
When you hear about unemployment numbers, that represents people who’ve been looking for a job within the last month. But there are many others, who may be able to work, but haven’t been looking for a job. Powell says, that number is unusually high right now. He says, “The United States has a lower labor force participation rate than almost every other advanced country.” He says, it’s very important to bring people back into the labor force.
Powell says, they have disappeared for many reasons. The recession knocked a lot of people out of the labor force. Technology has also advanced rapidly leaving many workers with outdated skills. Globalization has also affected many workers as companies move their operations overseas. The opioid crisis is apparently a big factor as well, especially among younger men.
Powell says, the labor force participation rate is one of the longer-running challenges that we face. He explains, we need policies that can “support and reward work, provide training and education, and generally try to raise U.S. labor force participation so that we’re no longer at the bottom of the league table among advanced economies.” He says, that will also contribute to economic growth so it’s a “win-win” for the economy and people who need paychecks.
He says, the labor force participation rate is currently 63.2%, and that another three or four percent would make it a very good number. But even at that higher number, you get a much different snapshot of U.S. employment from the labor participation rate than you get from the unemployment rate.
The U.S. Debt Problem
U.S. debt is also a concern. It’s not the Fed’s job to set policy for the national debt, but Powell says, “When something threatens the overall economy, I feel that we have a duty to speak up.” He says, the national debt is a threat over the long-term, because the debt is growing faster than the economy. He doesn’t think we are currently on the cusp of a debt crisis, but he says that by accumulating more debt, taxpayers are paying more money to service that debt. He says, “It’s important that we get our hands around the debt.”
He touched on many more topics, including the strength of the banking system, the risk of cyber attacks, inflation, and what it’s like to attend the monthly Federal Reserve meeting with board members. But, one thing he did “not” want to comment on is President Trump. The President has criticized Powell and the central bank for raising interest rates. He even called the Fed “crazy” and “out of control.” But, Powell says he doesn’t think it’s appropriate to comment on the President or other elected officials.
President Can’t Fire Him
He did offer one bit of information related to President Trump. When asked if the president can fire him, Powell said, “The law is clear that I have a four-year term. And I fully intend to serve it.” He then gave an unequivocal “no” to the question about the President being able to fire him.