1). Why would the chair of the Federal Reserve be concerned with slow growth of the labor force, falling labor force participation and slow growth in productivity?
a.These trends would cause slower growth in potential output and aggregate supply, which means inflation would increase less. The Fed would have to reduce interest rates to keep inflation steady.
b.These trends would cause slower growth in potential output and aggregate supply, which means inflation would increase more. The Fed would have to raise interest rates to keep inflation low.
c.These trends would cause slower growth in spending and aggregate demand, which means inflation would increase less. The Fed would have to reduce interest rates to keep inflation steady.
d.These trends would cause slower growth in spending and aggregate demand, which means inflation would increase more. The Fed would have to raise interest rates to keep inflation low.
The February 28 Wall Street Journal article summarizes Chairman Powell’s main remarks:
Mr. Powell focused the bulk of his remarks on how policy makers can better boost the nation’s long-term economic growth rate, which over the past decade has faced headwinds from a slowdown in the growth of the U.S. workforce, a decline in workforce participation among workers in the prime working years, and sluggish labor-force productivity growth.
His speech suggested that despite recent gains in workforce participation, state and federal policy makers would need to promote policies that could further increase productivity and participation. He also cast doubt on the idea that a decade long decline in productivity growth could be reversed by increasing business investment. “Unfortunately, it does not seem to be that simple,” he said, in part because low productivity growth has tracked slower growth in the supply of workers. “In this view, the productivity problem is not simply one of inadequate investment.”
2).What do these statements imply for monetary policy in 2019?
a.The Fed should leave the federal funds rate unchanged.
b.The Fed should increase the federal funds rate.
The February 22 Wall Street Journal article, summarizes a study by economists Hooper, Mishkin and Sufi:
Because the U.S. hasn’t had many episodes of very low unemployment in recent decades, the researchers looked at state and regional data to document a potential relationship between tighter labor markets and rising prices. Their analysis suggests the relationship here is stronger, with prices rising in an accelerating fashion as unemployment falls.
Evidence that the relationship “has been dormant for the past several decades does not necessarily mean that it is dead,” they write.
3)What do these statements imply for monetary policy in 2019?
a.The Fed should leave the federal funds rate unchanged.
b.The Fed should increase the federal funds rate.
The February 28 Wall Street Journal article quotes Fed chair Jerome Powell:
“The economy is in a good place,” he said. Despite sustained declines in unemployment in recent years, he added, signs of upward pressure on inflation “appear muted.” Mr. Powell said recent signs of an increase in workers’ hourly output could also keep prices from running higher. “Rising productivity allows wages to increase without adding to inflation pressures,” he said.
Mr. Powell pointed to risks that include slower growth in Europe and China and political uncertainty related to trade negotiations between Washington and Beijing as well as the U.K.’s discussions around how to leave the European Union.
“While most of the incoming domestic economic data have been solid, some surveys of business and consumer sentiment have moved lower,” Mr. Powell said. “Unexpectedly weak retail-sales data for December also give reason for caution.”
