A top aide to Federal Reserve Chairman Jerome Powell has warned of the danger of runaway inflation amid unusually tight labor markets, even as the central bank pauses its years-long effort to prevent prices from surging.
John Williams, president of the Federal Reserve Bank of New York, told a monetary-policy conference in New York on Friday that policymakers "cannot take for granted that inflation expectations will remain well-anchored."
U.S. unemployment is close to a half-century low, with reports that businesses are having difficulties finding qualified workers. Tight labor markets typically force employers to accelerate wage increases, and they often try to pass along those higher costs, leading to rising consumer prices.
But with U.S. growth slowing as the stimulus fades from President Donald Trump's late-2017 tax cuts, the Fed in recent months has paused its years-long effort to raise interest rates - the primary means by which officials try to keep inflation at bay.
"We must remain vigilant regarding a sustained takeoff in inflation," Williams said in prepared remarks. "Very tight labor markets could eventually lead to a resurgence of inflation and unmoor expectations, as in the 1960s."
The remarks underscored the risk that Powell and other Fed officials face as they seek to prevent the economy from falling into recession, following one of the longest economic expansions in U.S. history.
Trump's $1.5 billion of tax cuts were unusual in that they came at a time when unemployment already was low. Historically fiscal-stimulus packages have been passed at times when the economy was sluggish and unemployment widespread.
On average, economists still project growth this year at 2.5%, down from an estimated 2.9% in 2018, according to FactSet.
But a growing number of economists have fretted that overhanging factors such as Trump's trade battle with China, slowing growth in Europe and the recent government shutdown could lead to a global recession, which in turn could spread to the U.S.