As the U.S. unemployment rate heads toward low levels not seen since the 1960s, Federal Reserve Chairman Jerome Powell has more questions than answers.
Powell, who took over as head of the U.S. central bank earlier this year, said Tuesday in a speech that the current economic environment presents "significant uncertainty" for monetary policy, even as he reiterated there is a "strong" case to continue raising interest rates at a "gradual" pace.
"In the current environment, significant uncertainty attends the process of making monetary policy," Powell said.
The Fed last week raised interest rates for the seventh time since late 2015 to a range of 1.75% to 2%. The central bank had held the rate close to zero from 2008 through 2015 in a bid to revive the economy and markets following the financial crisis.
Fed officials are growing increasingly confident in the health of the U.S. economy, with revised projections showing that the central bank's monetary-policy committee could raise rates a total of four times this year, an increase from the three predicted in March. The committee also upgraded its assessment of economic growth to "solid" from "moderate," while omitting a phrase included in recent statements that interest rates would remain low "for some time."
Going forward, though, things might get murkier.
Unemployment, currently at 3.8%, is the lowest since April 2000, and many forecasters expect the rate to fall further into the mid-3% range "and remain there for an extended period," Powell said in the speech at a European Central Bank conference in Portugal.
If that happened, the unemployment rate would be the lowest since the 1960s, a level that triggered a surge in inflation to 5% from 2% in just five years. Low unemployment typically leads to higher competition for workers and thus faster wage gains that can fuel inflation. Currently, inflation is running right around 2%, the Fed's target for the ideal level.
But the historical comparison to the 1960s is flawed, Powell said, partly because of rising education levels since then, and because Fed officials have a better grip on traders' expectations for future inflation.
"Unfortunately, with the passage of a half-century and important changes in the structure of our economy and in central-bank practices, in my view the historical comparison does not shed as much light as we might have hoped," Powell said.
One problem is that economists aren't even sure what the "natural rate of employment" is -- the level at which inflation would remain stable, the chairman said.
"Natural rate estimates have always been uncertain and may be even more so now as inflation has become less responsive to the unemployment rate," Powell said.
What would happen if the unemployment ran below the natural rate for an extended period?
"Research on this question is ambiguous," according to Powell.
Could the low unemployment rate draw more people into the labor force? Or lead to higher worker productivity?
"The historical evidence is sparse and inconclusive," Powell said.
Draw your own conclusions.