Federal Reserve Chairman Jerome Powell suggested Wednesday that the U.S. could enjoy a period of 1960s-style low unemployment, but without the risk of repeating the high inflation that followed that era.
Powell’s remarks, delivered at a central banking conference in Portugal, were carefully hedged, but reveal that he is not predisposed to tighten monetary policy simply because unemployment is very low.
“In short, there is a lot to like about low unemployment,” Powell said at the start of his speech.
At 3.8 percent, the unemployment rate is now as low as it has been since 1969, and economists anticipate that it will keeping declining and stick around the lowest rates seen since the late 1960s, the era of some of the biggest gains for workers in history.
Fed officials and monetary economists now believe the Fed made a mistake back then in trying to trade higher inflation for lower unemployment, a lesson that Powell noted in his speech. Inflation soared over the course of the 1970s, leading to “stagflation,” which is high inflation coupled with high unemployment.
Powell said that he didn’t expect a similar mistake this time around. One reason is that the population is more educated, and educated people tend to have lower unemployment rates, indicating that overall U.S. unemployment could fall lower today without creating major imbalances.
He was careful, though, to say that the lessons that can be drawn from historical comparisons are limited, given the changes in the economy and central banking.
But he also downplayed another risk that many Fed-watchers worry about, namely the possibility that the Fed allowing low unemployment for a long time could lead to financial bubbles.
“I do not see broad signs of excessive borrowing or leverage,” he said.
