According to Federal Reserve Chairman Jerome Powell, the relationship between unemployment and inflation has fallen.
"The relationship between economic weakness or unemployment and inflation has been a strong fifty years ago … and has gone," Powell said on Thursday during his testimony before the Senate Banking Committee. He added that the strong tie between unemployment and inflation was broken at least 20 years ago and the relationship was "becoming weaker and weaker and weaker."
"Furthermore, we learn that the neutral interest rate is lower than was thought and … the natural unemployment rate rate is lower than we thought. So the policy of money is not became as accommondative as we had thought, "said Powell.
Under the Fed's dual mandate of full employment and price stability, the unemployment rate is low in history, up to 3.7% in June from 3.6% in May, which is the lowest since 1969. Inflation is has been sluggish in recent years and continues to be less than 2% of the Fed's target.
at the end of the day, have a connection because of the low labor will strengthen wages and ultimately higher wages continue to inflation, but we have not yet reached the point that's it. In many cases, the connection between the two is a small quote these days, "the Fed chief said.
US consumer goods prices rose by almost one and a half years in June, but the jump has not changed markets' expectations for a rate cut later this month.
Traders are pricing a 100% chance of a rate cut in July in part because inflation remains extremely low, according to the CME FedWatch tool Powell's testimony also fueled the hope for an easier policy.
Powell said on Wednesday the Fed was "acting appropriately" to maintain expansion as "crosscurrents" weighing more Fed lowered its target inflation for 2019 at June policy meeting, seeing headline inflation grows slower at 1.5% compared to 1.8% predicted in March.