US Federal Reserve chairman Jerome Powell said the fundamentals of the US economic expansion look strong and support the case for continued gradual interest-rate increases.
“There is good reason to expect that this strong performance will continue,” Mr Powell said on Friday at the Kansas City Fed’s annual policy symposium in Jackson Hole, Wyoming. “I believe that this gradual process of normalisation remains appropriate.”
US central bankers are raising interest rates gradually to keep inflation in check while at the same time giving the nearly decade-long expansion room to run. The Fed has signalled it will lift rates again next month, with a December move also widely expected. The policy has attracted the ire of President Donald Trump, who said in a recent interview that he was “not thrilled” with the Fed’s tightening.
Policy
US stocks rose and the dollar slipped as investors digested Mr Powell’s first speech as Fed chief at Jackson Hole. Yields on the 10-year treasury note were initially lifted before settling back to levels prior to his remarks.
Mr Powell’s speech discussed at length the challenges of monetary policy at a time when economic benchmarks – such as estimates of full employment or the neutral policy rate – are uncertain.
The two risks faced by the Federal Open Market Committee (FOMC) are moving too fast and shortening the expansion, or moving too slowly and allowing for overheating and financial excesses, he said.
“I see the current path of gradually raising interest rates as the FOMC’s approach to taking seriously both of these risks,” Mr Powell said. While unemployment is below the committee’s longer-run estimate of a rate that corresponds with non-inflationary use of labour resources, “there does not seem to be an elevated risk of overheating”.
“This is good news, and we believe that this good news results in part from the ongoing normalisation process, which has moved the stance of policy gradually,” Mr Powell said.
“As the most recent FOMC statement indicates, if the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate.”
Investors are pricing in another quarter-point increase from the central bank at their meeting next month. That would raise the target range for the benchmark lending rate to 2 per cent to 2.25 per cent. Odds of a second hike before year-end in December were little changed around 64 per cent.
Growth
There is scant evidence that the Fed’s removal of stimulus is hurting growth. Unemployment is low at 3.9 per cent, and inflation, according to the Fed’s preferred benchmark, is slightly above officials’ 2 per cent target.
To emphasise the Fed’s attention to inflation, Powell borrowed a line that European Central Bank president Mario Draghi used in July, 2012 to preserve the euro.
“I am confident that the FOMC would resolutely ‘do whatever it takes’ should inflation expectations drift materially up or down or should crisis again threaten,” Mr Powell said in his speech.
Mr Powell, who Mr Trump nominated for the job, is continuing an economic experiment that began under his predecessor Janet Yellen betting that the inflation response from a tight labour market would be muted.
So far, it has been. Various measures of wage growth are rising at annual rates of 2.5 per cent to 3 per cent and that hasn’t translated into a sharp increase in prices yet.
The tight labour market has produced lots of benefits, which Powell has hailed in previous remarks, saying there’s a “lot to like” about low unemployment.
“Over time, inflation has become much less responsive to changes in resource utilisation,” Mr Powell said.
The Fed chairman discussed risk-management strategy at a time when the economy’s structure is changing and uncertain.
Risks
“The FOMC has been navigating between the shoals of overheating and premature tightening with only a hazy view of what seem to be shifting navigational guides,” he said.
“The need for the sort of risk-management approach that originated in the new-economy era is clearer than ever before.”
Fed officials see near-term risks coming from White House policies, minutes from their July 31st-August 1st meeting show.
An escalating trade war could put a dent in hiring and investment, while fiscal stimulus could accelerate growth further at a time when the economy is already running hot.
“The economy is strong. Inflation is near our 2 per cent objective, and most people who want a job are finding one,” Mr Powell said.
“My colleagues and I are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labour market, and inflation near 2 per cent.” – Bloomberg
