FED: Powell says strong case for further rate hikes

Federal Reserve Chairman Jerome Powell said sturdy U.S. economic growth has built a strong case for continuing to gradually lift interest rates, and he warned against policy complacency now that the central bank has nearly achieved its employment and price stability goals.

“Today, with the economy strong and risks to the outlook balanced, the case for continued gradual increases in the federal-funds rate remains strong and broadly supported among” participants on the Fed’s rate-setting committee, Powell said Wednesday.

The Fed this month adopted its seventh rate hike since 2015 and forecast an accelerated pace of increases in its benchmark lending rates, predicting a total of four hikes for the year due to robust hiring and economic activity amid rising prices.

Given current conditions, and with “the risks to the outlook roughly balanced, the case for continued gradual increases in the federal funds rate is strong.” Powell spoke at the European Central Bank’s annual policy conference in Sintra, Portugal.

The Fed was befuddled last year by the extended weakness in inflation even though unemployment has steadily trended downwards.

But measures of price pressures now show inflation is moving towards the Fed’s two percent target. Still, the central bank has signaled it will not overreact, allowing inflation to run a little hot to offset the years when it ran cold.

Nevertheless, analysts say 2018 could be the year when a set of circumstances – higher oil prices, a weakening dollar and simultaneous global growth not to mention a brewing global trade war – at last combine with scarce labor and rising employment to drive up prices.

Mr Powell also noted, however, that the Fed faced heightened uncertainty when determining the so-called natural rate of unemployment – the level at which labor markets are balanced – making it harder to tell when the central bank should take action.

“Natural rate estimates have always been uncertain and may be even more so now as inflation has become less responsive to the unemployment rate,” he said, according to the text of his prepared remarks.

A less direct relationship between the unemployment rate and price pressures “makes it harder to assess whether movements in inflation reflect the cyclical position of the economy or other influences,” said Mr Powell.

Today’s economy has more college-educated workers than in the past, which depresses the natural rate of unemployment because they have lower unemployment rates than others.

Powell also said he was hesitant to draw too many lessons from the low-unemployment episode from the late 1960s because people now expect inflation to remain stable, reflecting in part the Fed’s success in keeping prices stable in recent decades.

In the 1960s and 1970s, if inflation went up one year, consumers expected it to rise by at least as much the following year. Officials believe such expectations can be self-fulfilling as workers demand pay increases and businesses raise prices in anticipation.

Still, Powell warned against turning complacent in assuming that stable inflation expectations would prevent growing pressures should unemployment fall lower. Inflation expectations have been stable “because central banks have kept inflation under control,” Powell said.

“If central banks were instead to try to exploit the nonresponsiveness of inflation to low unemployment and push resource utilization significantly and persistently past sustainable levels, the public might begin to question our commitment to low inflation, and expectations could come under upward pressure,” he added. Powell said there were no signs of this currently happening in the U.S.