Policy makers are “navigating by the stars” in their efforts to manage interest rates and jobs growth, the chairman of the Federal Reserve Board said Friday, but gradually raising interest rates remains the most likely path going forward.
In comments focusing entirely on the Fed’s mandates to control inflation and promote job growth, Powell told participants at a symposium sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyo., that policymakers are “navigating by the stars,” a reference to values economists use to gauge economic activity.
“At the Fed and elsewhere, analysts talk about these values so often that they have acquired shorthand names,” Powell said. “For example, u* (pronounced “u star”) is the natural rate of unemployment, r* (“r star”) is the neutral real rate of interest, and Π* (“pi star”) is the inflation objective.”
Powell admitted, however, that using such values for figuring out economic challenges is less straightforward than it sounds for the Federal Open Market Committee (FOMC), the Fed’s policy-making body. “Guiding policy by the stars in practice, however, has been quite challenging of late because our best assessments of the location of the stars have been changing significantly,” the Fed chairman said.
“While inflation has recently moved up near 2%, we have seen no clear sign of an acceleration above 2%, and there does not seem to be an elevated risk of overheating,” he said. “This is good news, and we believe that this good news results in part from the ongoing normalization process, which has moved the stance of policy gradually closer to the FOMC’s rough assessment of neutral as the expansion has continued.”
He noted the most recent FOMC statement indicates that, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.
“The economy is strong. Inflation is near our 2% objective, and most people who want a job are finding one,” Powell said. “My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labor market, and inflation near 2%.”
The Fed chairman also reiterated support the central bank’s system for setting policy. “The diversity of views on the FOMC is one of the great virtues of our system. Despite differing views on these questions and others, we have a long institutional tradition of finding common ground in coalescing around a policy stance,” he said.