US outlook strong, gradual rate hikes expected: Fed Chair

US outlook strong, gradual rate hikes expected: Fed Chair

Jerome Powell looks on after a swearing-in ceremony on Feb 5, 2018 at the Federal Reserve in Washington, DC. Powell succeeds Janet Yellen to become the new chair of the Federal Reserve. (Alex Wong/Getty Images/AFP)
WASHINGTON: The US economic outlook is strong and continued gradual increases in the key interest rate will help keep it on track, Federal Reserve Chairman Jerome Powell said in his debut congressional appearance on Tuesday (Feb 27).Powell said inflation has been held down by temporary factors but is set to rise this year closer to the two percent goal, as wage gains also accelerate at long last.In semi-annual testimony to the House Financial Services Committee, his first as Fed chairman, Powell said "the economic outlook remains strong" and "further gradual increases in the federal funds rate will best promote attainment of both of our objectives" of full employment and stable inflation.The central bank's preferred inflation measure rose only 1.5 per cent last year, well short of the target, but Powell in his prepared remarks repeated the Fed's view that it was held down partly by "transitory influences that we do not expect will repeat."The Fed raised the benchmark interest rate in December, and has indicated that three rate hikes are expected this year. However, that was before strong wage gains in the January employment report fueled fears the Fed will have to raise rates faster to head off inflation.Many economists now expect four moves in 2018, with the first coming at the policy meeting in late March.
While Powell gave no hint in his testimony of the number of increases he expects, he was bullish on the outlook, noting that "some of the headwinds the US economy faced in previous years have turned into tailwinds."In particular, in the wake of the tax cuts Congress passed in December, "fiscal policy has become more stimulative" while demand for US exports has firmed given the "solid economic growth of our trading partners," which is helping the manufacturing sector."In this environment, we anticipate that inflation on a 12-month basis will move up this year," reaching the two per cent goal in the medium term, he said. "Wages should increase at a faster pace as well."The Fed chief will take questions from lawmakers after his testimony, which could provide more details on his thinking.
STRIKE A BALANCEHe also highlighted "upbeat business sentiment" and strong sales, which should boost investment and in turn lead to higher productivity.Weak gains in productivity have held down wages, Powell said.On interest rates, he said the Fed "will continue to strike a balance between avoiding an overheated economy and bringing ... price inflation to two percent."But the final decision will depend on the economic data.Even though the Fed has embarked on a series of rate increases and begun reducing its massive bond holdings, financial conditions remain accommodative, he said.The economic recovery has supported strong job gains, averaging 179,000 a month in the second half of 2017. The unemployment rate now stands at 4.1 per cent the lowest in 17 years, arguably meeting the Fed's full employment objective.The number of people in the workforce has remained stable, which he said is "a sign of job market strength" at a time when the baby boom generation is leaving the labor force for retirement.Powell praised his predecessor, Janet Yellen, for her deft handling of monetary policy, and said he worked with her to ensure "continuity" of that policy.However, he indicated he finds the use of prescriptive monetary policy rules "helpful," which is a slight change from Yellen and will please Republicans who have been pushing the Fed to adopt strict rules in setting rates, rather than relying on judgements.
Source: AFP/de
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