The Limits of Fed Policy, Per Its Chairman

Although the Federal Reserve expects the U.S. economy will continue to expand along with a strong labor market and moderate inflation, the economy faces several long-term issues that are beyond the Fed’s scope or ability to address, according to its chairman, Jerome Powell.

Speaking before the congressional Joint Economic Committee in a prepared statement and question and answer period, Powell said labor force participation, which lags most other developed economies, and slowing productivity gains are key economic concerns but not necessarily ones the Fed can address.

“Think of the economy’s ability to grow as consisting of two things: how fast the labor force is growing and how much output per hour is growing,” said Powell. He added that trend growth of the labor force now is very slow — 0.5%, down sharply from 2.5% in the 1960s — and immigration accounts for about half of current growth rate.

“Immigration is a key input into our longer term growth rate,” added Powell. “If you look to population growth as a way to support higher growth in the U.S. then immigration would need to be in your thinking, but it’s something we don’t comment too much on.”

Neither is labor force growth or the growth of government debt — both matters for fiscal policy.

“The debt is growing faster than the economy … in nominal terms,” said Powell. “That is by definition unsustainable … Even with lower rates and with decent growth there is still going to be a need to reduce these deficits … over time.”

On monetary policy, which the Fed does control, Powell said the Federal Open Market Committee, which sets policy, sees “the current stance of monetary policy as likely to remain appropriate” so long as incoming economic information “remains broadly consistent” with the Fed’s outlook of moderate growth, a strong labor market, and inflation near its 2% target.