Federal Reserve boss tells Congress to get its house in order: Don Pittis

The world's most powerful central banker, U.S. Fed chair Jerome Powell, says strong inflation and low unemployment mean the country's economic boom is set to continue.

But when grilled yesterday by members of the Senate banking committee about the economic risks of trade wars and stagnating wages for the poorest Americans, he returned fire.

In wide-ranging testimony on the economy that went from the shocking effect of tariffs on agricultural prices to the impact of the opioid crisis on the workforce, Powell repeatedly pointed out what was within and outside the Federal Reserve's remit.

"These are unhealthy trends in the U.S. economy that we don't have the tools to fix," he said. "We don't have those tools. You have those tools."

As usual in congressional hearings, many of the senators appeared more interested in promoting their partisan views than actually getting the Fed chair's answer, often cutting him off after he'd begun to respond.

With a larger-than-usual audience watching for clues on Powell's reading of the economy, the senators used their questions to nail their own colours to the mast, sometimes trying to get the Fed chair to agree with their point of view.

Powell was frank but also careful to make it very clear when the issues were beyond the central bank's responsibility.

Repeatedly asked about the negative impact of a trade war on the economy, he said there are few signs so far that tariffs have had any damaging effect on jobs or growth. 

"I have to start by saying I'm really firmly committed to staying in our lane and, you know, our lane is the economy," he said. "Trade is really the business of Congress, and Congress has delegated some of that to the administration."

No-nonsense

But in his no-nonsense way, Powell made it quite clear where he stood on President Donald Trump's protectionist strategy. 

"Countries that have remained open to trade, that haven't erected barriers including tariffs, have had higher incomes, higher productivity," he said. "And countries that have gone in a more protectionist direction have done worse."

After one senator pointed out that farmers in his state are getting less than the cost of production for crops such as soybeans and corn, Powell said the issue is whether they are victims of a short-term negotiating strategy that would actually serve to bring tariffs down. That, he said, could be good for the economy.

But agricultural tariffs that last longer, say a matter of years, would hurt.

"Certainly it would be very tough on the rural communities and, you know, I think we'd feel that at the national level, too."

Several senators, including Democrat Elizabeth Warren, who is mooted as a potential presidential candidate, gave Powell a tongue-lashing. In her case, it was over large bank profits and inadequate regulation, but she gave him little time for a full response.

Some of Powell's most revealing testimony came in response to questions about the state of the country's fractured labour force, where wages have stagnated and many "prime-age males," as he called them, have become addicted to opioids.

Human tragedy

Quoting the figure that 44 per cent of men ages 25 to 54 not in the workforce are taking painkillers, Powell revealed the human side behind his severe central banker's exterior.

"You know, it's a terrible human tragedy for many communities, certainly for the individuals and their families," he testified.

"Also, it matters a lot for labour force participation."

Many senators expressed concern that while wages have been rising at 2.3 per cent, inflation was 2.9 per cent this month, resulting in a net decline in real spending power. Powell said the trend shown by core inflation — leaving out prices for more volatile goods like gasoline — is more moderate.

And, of course, with the blunt tool at the central bank's disposal, all Powell can do is adjust interest rates to try to maximise total employment.

Market theory might say full employment — and the shortage of workers it creates — should eventually push wages higher, but the Federal Reserve doesn't control how income is distributed. Nor does it set the minimum wage.

And while the Fed has shown it has succeeded in its two congressional mandates — to create jobs and keep the dollar stable — Powell says the U.S. economy faces a series of unhealthy trends that are also outside the bank's control, including an aging workforce, low social mobility and a male prime-age labour participation rate that has been shrinking for 60 years.

The reasons for those trends are complex, but when pinned down by Sen. Bob Corker of Tennessee, Powell narrowed it to one main cause: Stagnating educational achievement.

"When U.S. educational attainment was rising, technology was coming in, it was looking for more skills," Powell testified, explaining the U.S. has lost its lead. "You had productivity rising, you had incomes rising, inequality declining over a long period of time.

"U.S. educational attainment flattened out in the 1970s and everywhere else in the world it's been going up."

Follow Don on Twitter @don_pittis