Federal Reserve Chairman Jerome Powell said the relationship between unemployment and inflation has collapsed.
"The relationship between slack in the economy or unemployment and inflation was strong 50 years ago … and has passed away," Powell said Thursday during his testimony in front of the Senate Bank Committee. He added that the strong bond between unemployment and inflation was destroyed at least 20 years ago, and the relationship "has become weaker and weaker and weaker."
"In addition to that, we learn that the neutral interest rate level is lower than we had imagined and … the natural unemployment rate is lower than we thought. So monetary policy has not been as accommondative as we had thought," Powell said. ] Under the Fed, there are two full-time mandates for full employment and price stability, unemployment rates have been historically low, and increased to 3.7% in June from 3.6% in May, the lowest since 1
The so-called "Phillips Curve", which the Fed trusts to steer its political direction, claims that as unemployment falls, inflation should rise, a phenomenon which has not happened during this economic expansion.
"That at the end of the day there must be a connection because low employment will run wages and ultimately higher wages will drive inflation, but we have not reached that point. In many cases, this connection between the two quotes is small these days, "said the Fed boss.
US underlying consumer prices rose the most in nearly a year and a half in June, but the jump did not change markets expectation of a price decline later this
Traders prices in a 100% chance of a July price decline, partly because inflation has remained so low, according to the CME FedWatch tool, Powell's testimony also drove hope for a
Powell said on Wednesday that the Fed will "act as appropriate" to maintain the expansion as crosscurrents weighs on the economic outlook, noting that US business investment has slowed "especially" recently, while the Fed lowered its inflation target for 2019 at its June meeting as surplus growth slowed down. 1.5%, versus 1.8% in March.