Fed Chair Powell Indicates He’ll Keep Bolstering Growth in Public Debut
Posted February 27, 2018 7:53 p.m. EST
WASHINGTON — Jerome Powell, the new chairman of the Federal Reserve, said in his public debut on Tuesday that his expectations for domestic economic growth have increased since the beginning of the year, citing the passage of the $1.5 trillion tax cut and stronger global growth.
In testimony before Congress, Powell said that the Fed planned to continue increasing its benchmark interest rate only gradually, as it did under his predecessor, Janet L. Yellen. But investors responded to his optimism as an indication the Fed may be compelled to move more quickly. As Powell testified, stocks fell, the dollar strengthened and bond yields rose.
Powell told the House Financial Services Committee that headwinds once holding back the U.S. economy had now turned into tail winds.
“My personal outlook for the economy has strengthened since December,” Powell said.
Yet he struck a careful tone. Inflation has remained sluggish for nearly a decade, and Powell said the Fed “will continue to strike a balance between avoiding an overheated economy” and allowing inflation to tick up toward the Fed’s target of a 2 percent annual pace.
Most Fed officials forecast in December the Fed would raise rates at least three times in 2018, as it did last year.
Powell said he “wouldn’t want to prejudge" the new set of projections that officials will issue in March, but said they would take a recent run of strong economic data, including continued job growth and increased business investment, into account.
Investors widely expect the Fed to raise its benchmark interest rate in March, into a range of 1.5 percent to 1.75 percent, and most expect another quarter point increase in June.
Some Wall Street analysts said that Powell’s testimony increased the chances that the Fed would continue with quarterly rate hikes in the second half of the year.
“We are naturally more confident in our standing call for four hikes this year and another four next year,” said Michael Feroli, the chief U.S. economist at JPMorgan Chase.
But the Fed has emphasized that stronger growth is necessary to justify three rate hikes this year. Fed officials have also said growth will not prompt the central bank to raise its benchmark interest rate more quickly unless it increases inflationary pressures.
Randal K. Quarles, the Fed’s vice chairman for supervision, said Monday that the tax cuts could increase the country’s economic capacity, allowing faster growth without faster inflation. His remarks suggested the Fed is willing to wait and see what happens.
“I will be carefully watching indicators of economic activity and inflation and assessing the degree to which activity appears to be pushing up against the constraints of the economy, as opposed to being a reflection of the expansion of those constraints and the growth of the potential output of the economy,” Quarles said.
Lawmakers grilled Powell on Tuesday on many subjects. House Republicans, who pressed for Trump to put a Republican in charge of the central bank, asked Powell how he would respond to changes made after the 2008 financial crisis, including stronger financial regulations and a new approach to managing interest rates.
Democrats, nervous about the new leadership, pressed Powell for assurances that the Fed would remain committed to supporting job growth and that it would enforce laws aimed at reducing discrimination by financial institutions.
Both sides sought Powell’s affirmation for their views about the economic effect of the $1.5 trillion tax cut that took effect in January.
Powell began his remarks by commending Yellen on her tenure and calling for continuity with her policies. But the differences between Powell, a former investment banker, and his predecessor, a labor economist, showed through. Unlike Yellen, Powell shied away from questions about economic inequality, and he spoke more freely about financial regulation. Powell reaffirmed to House members that the Fed intends to loosen some limits on banks. One change could reduce capital requirements for some large banks, allowing them to rely more heavily on borrowed money.
The goal of the changes is to reduce the burden of regulation “without losing any safety and soundness,” Powell said. He also said the Fed plans to reduce regulation of smaller banks.
He added the Fed must be alert to both the buildup of financial imbalances and inflation, but that neither risk appeared high at the moment.
“There’s always a risk of a recession at any point in time, but I don’t see it as at all high at the moment,” Powell added. “I would expect the next two years on the current path to be good years for the economy.”
Stocks took a tumble this month as investors began to chew on the possibility of faster rate hikes. Powell dismissed the turbulence, saying the Fed saw no evidence that it was “weighing heavily on the outlook for economic activity, the labor market and inflation.”
The losses on Tuesday were more modest. The Standard & Poor’s 500 lost 1.27 percent, closing at 2,744.28.
Powell has taken the helm of the central bank as the economy is nearing the end of its ninth year of expansion. The Fed has been steadily raising its benchmark rate back to a more normal level after cutting it to nearly zero to stimulate lending in response to the financial crisis.
Those rate hikes are intended to keep the economy from running too hot, while also giving the Fed the capacity to fight a future recession by once again cutting interest rates.
Although a strong economy and low unemployment typically drive up inflation, it has remained puzzlingly low in recent years. Powell acknowledged the trend, but said that he believed sluggish price increases were due in part to temporary factors and that inflation would gradually rise this year. He noted, however, that some indicators suggest the labor market still has room for improvement, including the modest pace of wage growth. The share of working-age adults who are not working also remains significantly higher than before the recession; most of those people are not counted in the unemployment rate because they are not actively seeking work.
Investors are watching carefully for any indication that inflation could lift off faster than they expected — a sign that the Fed might have to raise rates more quickly than it planned and risk choking off economic growth.
On Monday, Quarles was cautiously optimistic that faster economic growth is likely.
“There are indications that we have a sustainably stronger economy,” Quarles said. “It’s a little too early to call that as happening, but there are clear indications that it could be happening.”
Powell, a member of the Fed’s board of governors who was sworn in as chairman this month, will testify again Thursday before the Senate Banking Committee.