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US Fed to continue to raise interest rates gradually: Powell
WASHINGTON, July 18, 2018 (BSS/AFP) – The Federal Reserve will continue to
raise rates gradually as the US economic outlook remains strong despite
uncertainty over trade policy, Fed Chairman Jerome Powell said Tuesday.
Powell was upbeat about the US economy, noting that job creation remained
strong and inflation was right around the Fed’s two percent target.
In addition the recent tax cut is fueling consumer spending, and business
investment remains strong, he said in his semi-annual testimony to the Senate
Finance Committee.
However, he acknowledged that it was “difficult to predict the ultimate
outcome of current discussions over trade policy,” a clear reference to the
aggressive tariffs President Donald Trump has imposed on products from China
and many US trading partners, sparking outrage and retaliation.
The International Monetary Fund warned Monday escalating trade tensions
and tariff threats, if carried out, could disrupt global growth and derail
investments.
Still, Powell said the Fed’s interest rate-setting Federal Open Market
Committee was satisfied with the central bank’s efforts to get monetary
policy back to normal by raising rates and reducing the size of investments
accumulated in the wake of the 2008 financial crisis.
“With a strong job market, inflation close to our objective and the risks
to the outlook roughly balanced, the FOMC believes that — for now — the
best way forward is to keep gradually raising the federal funds rate,” Powell
said in his prepared testimony.
The FOMC increased the benchmark lending rate by a quarter percentage
point in March and in June — a total of seven times since December 2015 —
and most economists expect two more rate hikes this year.
– Trade uncertainty –
After two percent GDP growth in the first three months of the year, “the
latest data suggest that economic growth in the second quarter was
considerably stronger than in the first,” Powell told lawmakers.
But in response to repeated questions from Senators, the Fed chief
acknowledged that if the current trade frictions lead to higher tariffs, that
could harm the US and global economies, in particular American farmers.
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Trade policy “has significant effects on the economy,” Powell said, and
“there is no precedent for this kind of broad trade discussion.”
If the end result is lower tariffs globally “that would be good,” but if
higher tariffs are in place for a longer time “that will be bad for our
economy and other economies.”
He said an open and rules-based international system “has served us very
well” in bringing down barriers to trade.
But Powell said the Fed was now hearing about companies putting investment
plans “on ice for the time being.”
Despite strong growth and recent gasoline price increases, the Fed chair
was sanguine about the inflation picture, saying the rate had risen gradually
after remaining stubbornly low but had not accelerated too fast.
The central bank’s preferred inflation measure rose 2.3 percent in the 12
months ended in May, up from 1.5 percent a year earlier. Excluding volatile
food and energy prices, the “core” inflation rate was two percent.
– Wage growth at last? –
The economic recovery has supported strong job gains, averaging 215,000 a
month in the first half of 2018, “a good deal higher than the average number
of people who enter the work force each month,” he said.
And the unemployment rate of 4.0 percent is near the lowest in 20 years,
and arguably meeting the Fed’s full employment objective.
He noted that the number of people in the workforce had remained stable,
which is “a sign of labor market strength,” given the retirement of the baby
boom generation which is taking workers out of the labor force.
Still, wage growth has been sluggish and has not yet recovered to pre-
crisis levels, he said.
“On a brighter note, moderate wage growth also tells us that the job
market is not causing high inflation,” Powell said.
Challenged by several senators on the sluggish wage growth, Powell agreed
“not everybody is experiencing the recovery.”
The best way to improve prospects for workers is to boost US productivity,
including through investments in education and training, he said.
“We don’t have those tools, you have those tools. Congress has the tools,”
he said.
The Fed can only adjust interest rates, he added, “we don’t have tools to
support higher productivity.”
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