The Fed released its semiannual Monetary Policy Report just before scheduled testimony before the House and Senate next week by Jerome H. Powell, the Fed chairman.
The Fed’s report suggests officials are likely to stay on their telegraphed path of gradually raising interest rates to bring them back to historically normal levels. Officials raised rates at their June meeting, to a range of 1.75-2 percent, and signaled that they could raise rates twice more for a total of four rate increases this year.
At times, the report reads like a bit of self-congratulation among Fed officials for their performance in recent years, including steering inflation close to the Fed’s 2 percent annual target, supporting strong economic growth and a low unemployment rate, and pushing Wall Street firms to strengthen their defenses against a potential financial shock.
It drops language from previous reports that stressed worry that inflation would continue to run below the target. It also reaffirms that economic activity “increased at a solid pace” for the first half of the year and that “the labor market has continued to strengthen.”
The report highlights some lingering concerns in the economy, most notably slow wage growth. Adjusted for inflation, earnings for most U.S. workers have not risen in the past year. Other measures, which include employer-provided benefits such as health care, have increased after inflation is factored in, but not by as much as could be expected when the unemployment rate is about 4 percent.
Officials blamed that sluggishness on persistent weakness in labor productivity.
“Those moderate rates of compensation gains likely reflect the offsetting influences of a strong labor market and persistently weak productivity growth,” officials wrote.
The economic development that has most concerned stock markets and economists in recent months — the Trump administration’s escalating trade war with China and allies like Canada, Mexico and the European Union — barely registers in the report as a threat to the recovery.
While noting that trade concerns have rattled stock traders, bond buyers and currency markets, officials said they were confident that the Fed’s current policy path was the right one to handle those concerns.
“Many participants continued to express the view that the appropriate trajectory of the federal funds rate over the next few years would likely involve gradual increases,” officials wrote. “This view was predicated on several factors, including a judgment that a gradual path of policy firming likely would appropriately balance the risks associated with, among other considerations, the possibilities that U.S. fiscal policy could have larger or more persistent positive effects on real activity and that shifts in trade policy or developments abroad could weigh on the expansion.”
The report includes several observations about the evolving structure of the U.S. economy that carry implications for policymakers, particularly members of Congress and the administration as they seek to get able-bodied individuals back to work. The Fed attributes a decline in workforce participation among less-educated Americans in part to technological advancements that have automated jobs.
And it says a decline in participation among women, as compared with other industrial nations, is being driven by family policies in the workplace that do not support working parents.
“Caregiving responsibilities play an important role” in explaining why prime-age women participate less in the workforce than men, the report says. “This decision may reflect a lack of affordable child care.”
The report notes that rising oil prices have cost American families, on average, $300 a year more in gasoline. But it makes the case that oil price increases are far less damaging to the economy overall than they used to be, because of a surge in domestic oil production over the last decade.
That surge means that more of the money Americans spend on gasoline now stays in the country, the report says: “On net, the drag on GDP from higher oil prices is likely a small fraction of what it was a decade ago and should get smaller still if U.S. oil production continues to grow as expected.”
This article originally appeared in The New York Times.
Jim Tankersley © 2018 The New York Times