By retaining his predecessor’s patient approach to rate increases — and then stopping them altogether as inflation, which the central bank tries to keep under control, hovered at low levels — Powell’s Fed helped to keep the longest economic expansion in US history chugging along. The stretch of unbroken growth pushed unemployment to its lowest level in 50 years, prompting companies to cast a wider net for employees, pulling long-sidelined workers back into jobs.
“Both monetary and fiscal policy were stimulative, and it did lead to a strong labour market,” said Stephanie Aaronson, a former Fed researcher who is now at the Brookings Institution. Very low inflation “has given policymakers the latitude to try new things.”
That matters as more than a talking point: It could fundamentally shape the post-pandemic economy. The Fed has signalled that it intends to leave rates low to push unemployment down again, which could help return the labour market to strong levels. But the challenges posed by business closures and job reshuffling mean that elected officials, who have taxing and spending powers that the Fed lacks, may prove crucial to the speed and scope of the rebound.
“The single most important thing we can do here is to support a strong labour market,” Powell said in late August remarks. “That is more of an all-governmental society project,” and “to wait to the eighth and ninth year of the cycle to get those results — we can do better than that with other policies.”
To be sure, it is easy to overstate how strong conditions were before the pandemic struck.
About 83 per cent of adults in their prime working years were in the labour force at the start of 2020, which was a marked improvement but still down from an 84.6 per cent high in the late 1990s. Inequality prevailed. Wage growth had picked up from the expansion’s early years, but it remained shy of historical records.
But there is no doubt that the pre-pandemic job market was robust. Unemployment had declined to 3.5 per cent, its lowest level in half a century. Prime-age workers who had dropped out of the labour market were surprising economists by applying for jobs. Unemployment for black and Hispanic workers hit record lows, and pay was picking up for those who earned the least.
Now, the pandemic recession has thrown millions out of work, hitting disadvantaged groups especially hard. Black unemployment stood at 13 per cent in August, for instance, compared to 7.3 per cent for white workers.
Trump is already taking a victory lap as the job market begins to heal, calling the rebound “the fastest labour market recovery from an economic crisis in history” during a news conference on the weekend. But about half of the people who have lost jobs since February remain unemployed. Economists have warned that the return to full strength could become a grinding process, and Powell has said that some workers may struggle to return to jobs.
Understanding the policy mix that helped make the labour market so strong in 2019 will be critical to putting the United States back on track for another robust period of growth.
Some of the policies pushed through by Trump and lawmakers did help to bolster economic growth, which can drive hiring, economists said. The government was spending more freely, and the administration’s signature tax cuts, passed in late 2017, seem to have delivered a fleeting jolt to the economy.
Economists at the University of Pennsylvania’s Penn Wharton Budget Model say that the Tax Cuts and Jobs Act helped growth to jump to about 3 per cent for 2018, but the effect faded as growth returned to 2.2 per cent in 2019.
“We don’t project any material impact on growth from TCJA in 2019 or going forward,” said Alexander Arnon, a senior analyst at the Penn Wharton Budget Model, a research centre that analyses and predicts the effects of tax and other policy changes on the federal budget.
Data make it clear that the administration’s policies were not the whole story.
A chart of employment gains over the expansion show that they continued with remarkable consistency, month over month and year after year, starting from around 2010. The jobless rate slowly and steadily dropped. And people gradually trickled back from the labour market’s sidelines.
Much of the improvement seems to have been driven by a long, steady economic expansion, creating a self-sustaining cycle in which workers got hired, spent more and fuelled demand that created more jobs.
Fed policy helped to enable the progress. Starting under Powell’s predecessor Janet Yellen, the central bank chose to lift interest rates at a historically slow pace, treading carefully to avoid crashing the expansion while also trying to avoid runaway inflation.
Powell, who assumed the Fed chair in February 2018, raised rates four times during his first year — still a much slower pace than in prior business cycles — before pausing in early 2019 as markets gyrated. Under his watch, the central bank allowed the unemployment rate to fall to recent lows without trying to offset that change, and even lowered interest rates in the second half of 2019 to help sustain the expansion amid Trump’s trade war, which included steep tariffs on Chinese goods.
The good news for the post-crisis recovery and rebound is that the Fed is likely to again let unemployment fall sharply.
In an update to its long-run framework in late August, the Fed officially signalled that it will no longer raise interest rates because of a low unemployment rate alone, effectively codifying the practice adopted last year.
The bad news is that the central bank is low on ammunition to prod the economy. It was able to cut interest rates by only 1.5 percentage points when the pandemic started, compared to cuts that totalled about 5 per cent during the prior two recessions. Relying too much on low rates could make for another very gradual recovery — one like the last long expansion, which took nearly a decade to really pull workers in from the sidelines.
“We really need it to be broader than just the Fed,” Powell said of post-pandemic labour market policies, speaking at the Kansas City Fed’s conference in late August.
The New York Times