By Denny Gulino
WASHINGTON (MaceNews) – Federal Reserve Chairman Jerome Powell Tuesday successfully avoided waking up the markets with any unexpected blockbuster observations yet his message was as profound as it was unwelcome, that until Congress tackles fundamental challenges that bear on productivity growth, there isn’t going to be any surge in wages.
Powell had taken pains to eliminate any suspense by previewing his testimony in a media interview, perhaps unprecedented for any Fed chairman just a few days before semiannual testimony to Congress. The fact that the formal Monetary Policy Report is now published beforehand also worked to extract any of the excitement that has accompanied many of his predecessors’ appearances.
Powell’s matter-of-fact persona and plainspokenness led Sen. Bob Corker to observe that following the Fed has becoming boring so far in his young chairmanship.
There was a brief spark of newsiness when Powell indicated that, on the regulatory front, the Fed is not going to alter the landscape for foreign banks operating in the United States after all despite earlier hints to the contrary.
Overall, though, Powell returned many of the hot potato questions on stagnant wages and income inequality right back into the laps of the senators he faced, without any uncomfortable confrontation but with a frankness than congressional committees are not used to.
Income inequality and wage growth “are really the issues the Fed really doesn’t have the tools or the mandate to fix,” he said, “but which nevertheless are significant long-term economic challenges.”
Educational attainment “stagnated” before wages, which haven’t moved much in four decades, and besides, uncertainty about trade policy, while not visible in economic statistics yet, could be postponing capital investment planning that otherwise could lead to an increase in anemic productivity growth, he went on.
Labor force participation among “prime age” workers has been declining, he said, for 60 years. Labor force mobility is down. “These are unhealthy trends in the U.S. economy that we don’t have the tools to fix” at the Fed, he said. “You do.”
“These are things for the legislature to work on,” he continued. “It comes down to things that are easy to say and hard to do, like improve education, deal with the opioid crisis.”
The potential growth rate of the country, he said, “looks like it’s slowed down, because of the aging really, and demographics and things like that. These are big issues. We can’t really affect them with monetary policy.”
Yet there were periods in recent American history when productivity rose several times faster than wages, he was asked. “Over a long period of time, wages can’t go up sustainably without productivity also increasing,” he answered. “It’s a different thing to say that higher productivity guarantees higher wages. I didn’t say that and I don’t think that’s true.”
Basically he seemed to be telling Congress not to ask him how to improve wages since productivity growth is the only thing that sustains widening prosperity and only Congress can create incentives or otherwise clear the way to make America more productive. Powell’s calm demeanor seemed to temper the contained outrage that several questioners expressed, as business and bank profits go up, but the share of labor income gleaned from the economy moderates.
While Democrats tried to pry a quote from Powell they could use to pummel administration trade policy or lack of it, he continued to respond in generalities, that trading nations do better than those that practice protectionism. He did acknowledge at one point that life in rural America, where soybean prices are at a decade low already due to China’s retaliation, will be getting tougher if tariffs and counter-tariffs grow and stay in place a long period of time.
Another “gotcha” category that Powell successfully eluded was about last year’s tax cut legislation that Democrats would like to be categorized as a huge waste of $2 trillion, much of which is being funneled to shareholders – a third of which are foreigners – through stock buybacks.
Powell answered one question by saying anticipation of a tax cut probably helped boost 2017’s economy and that its aftereffects will probably be discernable perhaps for up to three years in the future. But what about now? Now, he said, it’s too soon to see solid effects from legislation that has not yet had time to make itself felt in the economy.
Perhaps most telling was his acknowledgement that the consensus outlook updated each quarter by the Fed governors and regional bank presidents has not bumped up compared to last year because the tax law was reworked. The growth outlook is still 1.8% before and after.
On the questions the markets wanted answered, how many more times – once or twice – will the Federal Open Market Committee raise interest rates this year, both the questioners and Powell remained silent. The economy is doing well, and American workers are doing better than a year ago despite indicated wage growth of just 2.7%. That wage growth, he said, had been around 2% and now it’s approaching 3%.
The implication was that gradual rate hikes will continue as the economy continues to improve. Just don’t expect wage growth to accelerate to the extent that was once taken for granted.