Powell Bullish on Economy, but Sees No Signs of Overheating -- 3rd Update

03/01/18 06:27 PM EST
By Nick Timiraos 

WASHINGTON -- Federal Reserve Chairman Jerome Powell offered an upbeat view of the economy over two days of testimony on Capitol Hill this week, opening the door to four quarter-point interest-rate increases this year.

Fed officials in December projected three rate increases this year. Mr. Powell's comments Tuesday and Thursday signaled they remain on track for at least that many and could consider one more if the economy picks up steam.

At the same time, Mr. Powell didn't suggest the Fed felt any urgency to plot a steeper path of rate increase in reaction to stronger economic data and recently enacted tax cuts and spending increases likely to spur growth this year.

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

Markets fell in early February after increases in wages and market-based measures of inflation fanned investor fears the Fed might dial up the pace of rate increases.

Mr. Powell, however, told the Senate Banking Committee on Thursday he didn't see decisive evidence of a breakout in wage gains.

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

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

Bonds rose and stocks seesawed during his testimony Thursday morning.

On Tuesday, stocks and bonds sold off after Mr. Powell told a House panel his own economic outlook had improved, leaving the impression he could lead Fed officials to slightly increase the pace of rate increases this year.

The Fed lifted its benchmark short-term interest rate to a range between 1.25% and 1.5% in December and is likely to raise the rate at the policy meeting March 20-21.

Officials have debated in recent years whether to raise rates more slowly than tentatively planned, but now their debate centers on whether to go a touch faster.

"It makes sense to think about three or four rate increases in 2018," San Francisco Fed President John Williams said last week.

Mr. Powell said this week the central bank remains likely to raise rates gradually. New York Fed President William Dudley said Thursday in Brazil that four rate rises this year "would still be gradual."

Inflation remains below the Fed's 2% target, but it has been firming in recent months.

Consumer prices excluding volatile food and energy categories rose 1.5% in January from a year earlier, same as in November and December, according to the Fed's preferred gauge. But on a six-month annualized basis, such so-called core prices were up 2% in January, the largest gain in 16 months and up from 1% over the same period ended in July.

Mr. Powell, who was sworn in as Fed chairman last month, has taken the helm while lawmakers and the Trump administration embark on an unusual fiscal policy experiment.

With the unemployment rate at a 17-year low of 4.1%, President Donald Trump and the GOP in recent months enacted tax cuts of at least $1.5 trillion over 10 years and spending increases worth $300 billion over two years that will swell federal budget deficits. These measures could boost household and business spending and push up inflation.

Mr. Powell's testimony acknowledged how the tailwind from fiscal stimulus could shift the Fed's focus.

Since the recession, Fed officials have kept rates very low to support hiring and nudge inflation higher. Now, they don't want to leave borrowing costs so low that asset bubbles form or price pressures surge.

Mr. Powell said the Fed is focused on striking "a balance between avoiding an overheated economy and bringing...inflation to 2% on a sustained basis."

Fed governor Lael Brainard, who has favored raising rates very cautiously, is scheduled to speak Tuesday on how policy should respond when headwinds become tailwinds.

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

The possibility of new trade tariffs could complicate the Fed's plans. Mr. Trump said Thursday he would enact 25% tariffs on imported steel and 10% tariffs on imported aluminum next week.

Mr. Dudley 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.

While increased global trade since the turn of the century took a sharper toll on certain U.S. communities than economists had anticipated, Mr. Powell said there were better ways to support those hurt by competition from imports than to impose tariffs that could impose costs more broadly across the economy.

"The tariff approach is not the best approach," he said, while declining to comment specifically on Mr. Trump's plans.

Michael S. Derby contributed to this article.

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


(END) Dow Jones Newswires

March 01, 2018 18:27 ET (23:27 GMT)

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