Federal Reserve Board Chairman JeromePowell. (Photo: Bloomberg)

Although the Federal Reserve expects the U.S. economy willcontinue to expand along with a strong labor market and moderateinflation, the economy faces several long-term issues that arebeyond the Fed's scope or ability to address, according to itschairman, Jerome Powell.

Speaking before the congressional Joint Economic Committee in aprepared statement and question-and-answer period, Powell saidlabor force participation, in which the U.S. lags most otherdeveloped economies, and slowing productivity gains are keyeconomic concerns but not necessarily ones the Fed can address.

"Think of the economy's ability to grow as consisting of twothings: how fast the labor force is growing and how much output perhour is growing," said Powell. He added that trend growth of thelabor force now is very slow—0.5 percent, down sharply from 2.5percent in the 1960s—and immigration accounts for about half ofcurrent growth rate.

"Immigration is a key input into our longer-term growth rate,"added Powell. "If you look to population growth as a way to supporthigher growth in the U.S., then immigration would need to be inyour thinking, but it's something we don't comment too muchon."

Neither is labor force growth or the growth of governmentdebt—both matters for fiscal policy.

"The debt is growing faster than the economy … in nominalterms," said Powell. "That is by definition unsustainable. … Evenwith lower rates and with decent growth, there is still going to bea need to reduce these deficits … over time."

On monetary policy, which the Fed does control, Powell said theFederal Open Market Committee (FOMC), which sets policy, sees "thecurrent stance of monetary policy as likely to remain appropriate"so long as incoming economic information "remains broadlyconsistent" with the Fed's outlook of moderate growth, a stronglabor market, and inflation near its 2 percent target.

If there are developments that cause the Fed to reassess itsoutlook, however, the Fed will respond, said Powell. "Policy is noton a pre-set course," he said, repeating a statement he has mademany times before.

The central bank has lowered the federal funds rate three timesthis year, to a current range of 1.5 to 1.75 percent. Itspolicymakers meet one more time this year, on Dec. 10 and 11, butno change in rates is expected. The CME FedWatch tool is currentlyshowing less than 4 percent odds of another Fed rate cut.

When asked by Rep. Don Beyer, D-Va., if the Fed has enough roomto cut rates during the next recession, Powell said there was "lessroom to cut in the new normal of lower rates and lower inflation,"which is an issue for many central banks around the world. Fed ratecuts during recessions since World War II typically total 5percent, Powell said.

Asked about the prospects of negative rates in United States,Powell said that would not be appropriate in the current U.S.economic environment and tends to be adopted in larger economieswhen "growth is quite low and inflation quite low. It's just notthe case here."

The limited ability of the Fed to cut rates in the nextrecession was the impetus for its current external review ofmonetary policy. "We're looking for ways to make sure that we havethe tools to do what we're assigned to do … achieve maximumemployment and stable prices even during downturns," saidPowell.

He said the Fed expects to finish the review by the middle ofnext year and noted that monetary policy is not the only responseto an economic slowdown. "Fiscal policy is often a big part of theanswer when there's a severe downturn."

From: ThinkAdvisor