Föhrenbergkreis Finanzwirtschaft

Unkonventionelle Lösungen für eine zukunftsfähige Gesellschaft

Fed’s Powell Says His Economic Outlook Has Improved

Posted by hkarner - 1. März 2018

Date: 28-02-2018
Source: The Wall Street Journal

Central-bank chief sees ‘further gradual increases’ in interest rates

WASHINGTON—Federal Reserve Chairman Jerome Powell said the economy’s prospects have brightened in recent months, indicating the central bank is on track to keep gradually lifting short-term interest rates and perhaps even pick up the pace this year.

“My personal outlook for the economy has strengthened since December,” he told members of the House Financial Services Committee on Tuesday in his first Capitol Hill appearance since taking over as Fed chief earlier this month.

“We’ve seen continuing strength in the labor market. We’ve seen some data that will, in my case, add some confidence to my view that inflation is moving up to target. We’ve also seen continued strength around the globe, and we’ve seen fiscal policy become more stimulative,” he said in answer to a question about what could cause the Fed to raise rates more than three times this year.

He added that he “wouldn’t want to prejudge that” outcome. But many investors took his comments as a sign of increased odds the Fed could lift its benchmark federal-funds rate four times in 2018, up from the three moves penciled in by officials in December.

Stocks fell, the dollar rose and U.S. bond yields rose after his remarks. Futures contracts linked to the central bank’s rate policies showed a roughly 33% probability it would move at least four times, in quarter-percentage-point steps, by year’s end, according to data from CME Group .

“The basic takeaway is not complicated: The likelihood of moving to a four hike baseline in March has gone up,” wrote Krishna Guha, head of global policy at Evercore ISI in a note to clients.

The Fed raised rates in December to a range of between 1.25% and 1.5% and is likely to lift them at its March 20-21 meeting.

Mr. Powell cited a variety of reasons for his increased optimism. Employers have continued to add jobs—180,000 a month on average over the past six months—and unemployment remains at a 17-year-low. Wage gains, which have been sluggish since the recession, should begin to pick up, he said. Inflation, which has undershot the Fed’s 2% target for years, is also showing signs of accelerating and should reach the goal in coming years, he said.

Recently enacted tax cuts and a new government spending plan also should boost economic growth, he said.

“I would expect the next two years, on the current path, to be good years for the economy,” he said.

Even the market turmoil earlier this month hasn’t dimmed his enthusiasm. “At this point, we do not see these developments as weighing heavily on the outlook for economic activity, the labor market and inflation,” he said.

Mr. Powell said the strong job market and recent corporate tax cuts will boost consumer spending and make businesses more confident about investing, which should boost productivity. Stronger growth overseas, meanwhile, has benefited American exports and “provided considerable support to our manufacturing industry.”

The task now for Fed officials will be to continue nudging up inflation without letting the economy grow so strongly that asset bubbles appear. The Fed “will continue to strike a balance between avoiding an overheated economy and bringing…inflation to 2% on a sustained basis,” Mr. Powell said.

Mr. Powell is scheduled to testify Thursday before the Senate Banking Committee. The Commerce Department will release January inflation data that morning, which could show consumer price growth rising closer to the Fed’s goal.

Lawmakers didn’t seriously challenge Mr. Powell in his inaugural hearing. But the new boss faced pointed questions from committee Chairman Jeb Hensarling (R., Texas) about the central bank’s practice of adjusting short-term interest rates by adjusting the rate it pays on the money private banks park at the Fed, called reserves.

Mr. Powell, in response, said the current approach “seems to be working very well.”

Mr. Hensarling also pressed Mr. Powell on the pace at which the Fed was shrinking its portfolio of bonds purchased during and after the financial crisis to stimulate the economy.

Democrats pressed Mr. Powell on questions of economic inequality and employment gaps between black and white workers. He said those questions were outside the Fed’s scope of action.

In response to questions from lawmakers, Mr. Powell also said Congress should focus on reducing government debt. “We really need to get on a sustainable fiscal path, and the time to be doing that is now,” he said.

Rep. Maxine Waters (D., Calif.), left, ranking member of the House Financial Services Committee, and Rep. Jeb Hensarling (R., Texas), the committee’s chairman, shared a laugh during Tuesday’s hearing.

Mr. Powell also defended the Fed’s 2% inflation target, a topic that has generated much discussion among economists and officials. “That framework is working. The market understands it,” he said in response to a question about whether he expects to move away from that goal.

Central bankers like to maintain inflation around 2% because it is a sign of healthy demand in the economy. Modest inflation also pushes up borrowing costs, giving central bankers room to lower their benchmark interest rates if they need to support the economy in a downturn. But some economists have recently suggested adopting a less rigid goal, such as a range rather than a specific level, or letting inflation drift up during expansions to give the central bank more space for rate cuts.

Among those who would prefer a different inflation target: Mr. Powell’s predecessor, former Chairwoman Janet Yellen. Speaking on a panel at the Brookings Institution on Tuesday, Ms. Yellen said the Fed “probably would come out with a higher inflation target now if we were starting from scratch.”

But moving it up is “a tricky business,” she said.

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