Powell Sees Gradual Rate Hikes Amid Strong U.S. Growth Outlook

Federal Reserve Chairman Jerome Powell said the central bank can continue gradually raising interest rates as the outlook for growth remains strong, and the recent bout of financial volatility shouldn’t weigh on the U.S. economy.

“Some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” Powell said in written testimony to the House Financial Services Committee on Tuesday in Washington. “Fiscal policy has become more stimulative and foreign demand for U.S. exports is on a firmer trajectory.’’

Powell takes charge of the rate-setting Federal Open Market Committee at a time when the world’s largest economy may be shifting gear to faster growth, somewhat higher inflation, and declining unemployment. Adding to the momentum are tax cuts and spending increases agreed to by Republican lawmakers and signed by President Donald Trump.

“In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis,’’ he said, in his first public appearance before Congress as Fed chief.

The recent correction in the stock market and rising rates on U.S. government debt shouldn’t hamper growth, he said.

“We do not see these developments as weighing heavily on the outlook for economic activity, the labor market, and inflation,’’ Powell said. “Indeed, the economic outlook remains strong.’’

Powell repeated the FOMC’s January message, saying “further gradual increases’’ in the Fed’s policy rate “will best promote’’ the attainment of the central bank’s objectives of maximum employment and stable prices.

The central bank has been struggling with too low inflation. The personal consumption expenditures price index has been below the central bank’s 2 percent target for most of the past five years.

“We anticipate that inflation on a 12-month basis will move up this year and stabilize around the FOMC’s 2 percent objective over the medium term,’’ Powell said.

He said the lag in wages during the expansion was due to low gains in output per hour, or productivity, though a new wave of investment spending “should support higher productivity growth in time.’’

“Wages should increase at a faster pace as well,’’ Powell said, adding that the FOMC continued to view the shortfall in inflation last year “as likely reflecting transitory influences that we do not expect will repeat.’’

The economy will expand at 2.7 percent rate this year, according to the median estimate in a Bloomberg survey, while headline inflation will rise to 1.9 percent.

U.S. central bankers predicted they would increase the benchmark lending rate three times this year in their December forecasts and investors widely expect the central bank will act at its policy meeting next month. Faster growth may test that gradual pace after years of modest economic performance.

A brightening economic outlook, and the possibility that could prod the Fed to raise rates at a faster pace, have prompted a reaction in financial markets also adjusting to the prospects of stepped-up U.S. government debt issuance to fund a widening budget deficit.

Yields on U.S. government 10-year notes have risen to 2.87 percent compared with 2.4 percent at the start of the year. The Standard and Poor’s 500 stock index is up 4 percent for the year to around 2,780, off its high for the year of 2,872.87 reached on Jan. 26.

Bloomberg

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Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell