Powell Bullish on Economy, but Sees No Signs of Overheating -- 2nd Update

03/01/18 02:10 PM EST
By Nick Timiraos 

WASHINGTON -- Federal Reserve Chairman Jerome Powell offered an upbeat view of the economy Thursday and indicated the central bank expects to continue to gradually raise short-term interest rates this year and beyond.

Mr. Powell said the Fed sees the potential for positive and negative economic surprises as roughly balanced.

That is a shift after several years when officials saw a greater risk that sluggish growth would force them to slow their rate-rise plans than that a stronger economy would cause them to move faster.

Mr. Powell told the Senate Banking Committee on Thursday he didn't see decisive evidence that steady declines in unemployment and less slack in the labor market had led to a breakout in wage gains, which could in turn fuel broader price pressures.

"Nothing in that suggests to me that wage inflation is at a point of acceleration," he said.

Bonds rose and stocks seesawed during his comments Thursday. U.S. government bond yields, which move in the opposite direction as prices, declined following Mr. Powell's comments on restrained wage growth, with the yield on the benchmark 10-year Treasury note falling to 2.819% recently, from 2.870% Wednesday. Meanwhile, the Dow Jones Industrial Average tumbled 390 points after the hearing, following President Donald Trump's announcement that he would approve new tariffs on steel and aluminum imports. The Dow had risen more than 150 points during Mr. Powell's testimony.

On Tuesday, stocks and bonds sold off after Mr. Powell offered the House Financial Services Committee a bullish view of economic growth that hinted officials could slightly increase the pace of rate increases as the economy gains momentum.

The Fed raised its benchmark short-term interest rate to a range between 1.25% and 1.50% in December and penciled in three quarter-percentage-point rate increases this year. Officials are likely to make the first such move at their meeting March 20-21.

Investors have been eager for more clues on whether Mr. Powell's read on the economy and recent fiscal policy might translate into a more aggressive approach to raising interest rates.

He said Tuesday several forces that in recent years hade been headwinds to growth, including fiscal policy and fragile growth prospects in Europe and Asia, have become tailwinds.

Lael Brainard, a Fed governor who has regularly counseled the Fed to move slowly in raising rates, is scheduled to speak Tuesday on how policy should respond when headwinds become tailwinds.

Mr. Powell offered few new signals about the Fed's outlook during his second day of testimony Thursday.

The Fed chief pointed to the fact that the share of working-age Americans who are employed or actively looking for jobs is still lower than it was before the financial crisis.

"I would expect that some continued strengthening of the labor market can take place without causing inflation," he said.

Inflation continues to run below the Fed's 2% target. Consumer prices in January were 1.7% higher than a year earlier, the same as in November and December, the Commerce Department reported Thursday before the hearing, releasing an update on the central bank's preferred inflation measure.

"There's no evidence that the economy is currently overheating," Mr. Powell said at Thursday's hearing.

Participants in futures markets have indicated they expect the Fed to raise its benchmark rate at least three times this year, in quarter-percentage-point steps, including at its meeting this month, according to CME. These investors also saw the probability of a fourth move in 2018 rise after Mr. Powell's testimony Tuesday.

The focus on the risk of the economy expanding too quickly is relatively new. It illustrates how the Fed's job could become more difficult now that the unemployment has fallen to 4.1%, a 17-year low, and is likely to fall further due to new fiscal stimulus enacted in recent months.

Mr. Trump signed into law a bill to cut taxes by $1.5 trillion over a decade in December, and in February approved a $300 billion, two-year increase in government spending.

The possibility of new steel and aluminum tariffs could further scramble the Fed's puzzle over inflation and growth. Mr. Trump said Thursday he would enact 25% tariffs on imported steel and 10% tariffs on imported aluminum next week.

New York Fed President William Dudley, speaking in Brazil on Thursday, said tariffs could boost domestic inflation, forcing the Fed to re-evaluate its interest-rate forecasts, though he declined to comment specifically on any current White House plans.

During Mr. Powell's three hours of testimony Tuesday, most of the market reaction centered on an exchange in which he said his "personal outlook for the economy has strengthened since December."

Mr. Powell had been asked what could cause the Fed to raise rates more this year than the three times. He replied by listing strong job-market gains, firming price pressures, improved global growth prospects, and a boost to economic growth from tax cuts and increased government spending as reasons to believe the economy is picking up steam.

Mr. Powell was simply stating facts about how conditions have changed since Fed officials delivered growth and interest-rate projections in December. But the selloff in stocks and bonds that followed is a sign of how sensitive investors are to clues the Fed might be inclined to raise rates more aggressively.

Mr. Powell said Tuesday he didn't want to prejudge whether officials would pencil in three or four quarter-point rate rises this year when they meet this month, but in offering his personal view, he provided insight into how he might shape any consensus at that meeting.

His testimony also hinted at how the Fed's focus has shifted. Since the 2007-09 recession, officials resisted calls to raise rates more aggressively in order to support stronger hiring. Mr. Powell said the Fed is now focused on striking "a balance between avoiding an overheated economy and bringing...inflation to 2% on a sustained basis."

Write to Nick Timiraos at nick.timiraos@wsj.com


(END) Dow Jones Newswires

March 01, 2018 14:10 ET (19:10 GMT)

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