Powell Doesn't See Signs of Economy Overheating -- Update

03/01/18 11:19 AM EST
By Nick Timiraos 

WASHINGTON -- Federal Reserve Chairman Jerome Powell returned to Capitol Hill on Thursday for a second day of testimony, with investors eager for more on whether his bullish view of the U.S. economy might translate into a more aggressive approach to raising interest rates this year and beyond.

Stocks and bonds sold off Tuesday after he told the House Financial Services Committee the Fed remains on track to gradually lift rates this year and hinted it might pick up the pace as the economy gains momentum.

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.

Mr. Powell 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."

Mr. Powell added the risks that inflation might rise or fall were much more balanced than they were two or three years ago, when there were more idle workers.

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 Thursday.

Participants in futures markets have indicated they expect the Fed to raise its benchmark short-term rate at least three times this year, in quarter-percentage-point steps, including at its meeting March 20-21, according to CME. These investors also saw the probability of a fourth move in 2018 rise after Mr. Powell's testimony Tuesday, but they haven't priced in many increases beyond this year.

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 projected by officials in December. 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 stocks and bonds sold off after the remarks, a sign of how sensitive investors are to clues the Fed might be inclined to raise rates more aggressively.

Mr. Powell said he didn't want to prejudge whether officials would pencil in three or four quarter-point rate rises this year when they meet in March, 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."

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.

President Donald 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.

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


(END) Dow Jones Newswires

March 01, 2018 11:19 ET (16:19 GMT)

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