This Week In The Economy: Fed Staying The Course On Interest Rate Hikes

Welcome to a regular snapshot-review of U.S. (and sometimes international) economic data that aims to 1) determine the direction of economic policy — such as the speed at which the Federal Reserve decides to raise interest rates, 2) provides a window into the challenges and decisions facing businesses today, and 3) assess what the impact will be for consumers.

Last year I wrote a short piece on why the head of the Federal Reserve is required by law to appear before Congress twice a year to testify on the central bank’s interest rate policy and outlook for the economy. This week (July 17 & 18), current chair Jay Powell will be grilled by Senate and House committees for the second time this year on the Fed’s actions to support economic growth.

Some key takeaways from his prepared testimony and the accompanying Monetary Policy Report released by the Fed:

Full Speed Ahead Mr Sulu

As noted in last week’s edition of ‘This Week In The Economy’, there are concerns the fledgling trade war between the United States and other major economies could hurt economic growth and cause the Fed to pause its almost three-year cycle of interest rate increases that began in December 2015.

For now, however, Powell argued in his testimony that “With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that — for now — the best way forward is to keep gradually raising the federal funds rate.”

Not Concerned About Prices Becoming Unstable, For Now

Recent economic data showed wholesale and consumer prices breached the Fed’s 2% inflation objective by noteworthy margins in June. Powell laid the blame for part of jump in overall inflation to higher oil prices, which he said then caused a sharp uptick in gasoline and other energy prices paid by consumers.

The Fed prefers to focus on core inflation, which excludes energy and food prices. Powell noted that annual core inflation was at 2% in May compared to1.5% a year ago, and the central bank will continue to keep a close eye on inflation to ensure to it remains near their price stability goal.

Strong Jobs Market, Stable Prices for Next Several Years. But…

While Powell said the Fed expects the U.S. job market will remain strong and inflation will stay near 2 percent “over the next several years,” in part due to factors such as federal tax and spending policies, he inserted this note of caution:

“It is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy.”

Translation: Don’t take anything for granted, things could turn out better or worse than the Fed’s prediction.

Discrimination, Incarceration Limiting Job Opportunities For Minorities

The Federal Reserve’s report noted the sharp drop in the unemployment rate for African Americans and Hispanics, falling down to levels not seen since the 1970s.

However, the U.S. labor force participation rate — workers employed or actively looking for work — has been declining since 2000, and among the factors cited by the Fed was the lack of job prospects for former inmates, and the impact of discrimination against minorities.

“Additionally, the share of the population — particularly black men — with a history of incarceration has increased over time. Individuals who have previously been incarcerated often have trouble finding work, in part because many employers choose not to hire people with such a background and likely also in part because incarceration prevents people from accumulating work experience and developing skills valuable to employers. Discrimination could also help explain the lack of participation for some minority groups, as they recognize that such discrimination limits their job opportunities.”

U.S. Workforce Not As Well-Educated As It Used To Be

And finally, Powell was quizzed for his thoughts on the sluggish rate of wage growth for U.S. workers compared to the strong pace of economic growth. A “stagnation of education achievement” was one reason he gave.

In other words, most of the jobs available these days require a level of education and skillsets that many unemployed Americans do not possess. But what are the odds we will get meaningful action from the administration and Congress to address this?

To be continued…