1. SOUNDBITE (English) Sen. Richard Shelby, (R) Alabama:
"We've observed in the past that there has been some type of relationship in previous years between inflation rates and unemployment rates as unemployment goes way down -- more jobs. There's pressure on wages and salaries and so forth. Is there a new paradigm out there as far as the evaluating this today and is it because of the global economy or what is it? Cause we have low unemployment but we have at the moment not a lot of pressure from your testimony and what we observe on inflation."
2. SOUNDBITE (English) Jerome Powell, Chairman of the Federal Reserve:
"The relationship between slack in the economy or unemployment and inflation was a strong one 50 years ago. If you remember that in the 60s there was a close correlation there. And that that has gone away and it's really been."
3. SOUNDBITE (English) Sen. Richard Shelby, (R) Alabama:
"But we had a different economy then did we not?"
4. SOUNDBITE (English) Jerome Powell, Chairman of the Federal Reserve:
"Very different economy in so many ways. And this in this way that really I would say that period at least 20 years ago that period was over and the relationship between unemployment and inflation became weak it's become weaker and weaker and weaker. In addition to that, I think we're learning that interest rates that the neutral interest rate is lower than we had thought. And I think we're learning that the natural rate of unemployment is lower than we've thought. So monetary policy hasn't been as accommodative as we had thought. So I think we're learning all of those things at the end of the day there has to be a connection because low unemployment will drive wages up and ultimately wages higher wages will drive inflation but we haven't reached that point in any case that connection between the two is quite small these days."
Federal Reserve Chairman Jerome Powell says before the Senate Banking Committee that very low unemployment rates no longer necessarily push up inflation. A relationship between the two existed "50 years ago" but that has gotten "weaker and weaker and weaker," Powell said.
Powell's comments in a second day of testimony on Capitol Hill suggest the Fed is more comfortable keeping short-term interest rates low and suggests that Fed policymakers may cut rates at its meeting later this month.
For decades, economists assumed that low unemployment — such as the current jobless rate of 3.7% — meant that employers would have to raise pay to attract and keep workers, and in turn would then raise prices to cover higher wage costs.
Many Fed officials historically would then support raising interest rates to forestall what was called a "wage-price spiral."
But now, Powell says, the unemployment rate can likely fall much further than in the past without sparking inflation, which means that interest rates can also stay lower.
"I think we're learning all of those things," he says.
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Jerome Powell , Richard Shelby
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