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Fed Chair Powell Indicates He’ll Keep Bolstering Growth in Public Debut Fed Chair Powell Indicates He’ll Keep Bolstering Growth in Public Debut
(about 5 hours later)
WASHINGTON — Jerome H. Powell, the new chairman of the Federal Reserve, painted an optimistic picture of the United States economy on Tuesday and signaled that he will continue to bolster strong growth during testimony before Congress in his public debut as head of the central bank. WASHINGTON — Jerome H. 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.
Mr. Powell, in remarks to the House Financial Services Committee, said the job market and business investment continued to strengthen, and that headwinds once holding back the American economy had now turned into tailwinds. In testimony before Congress, Mr. 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 Mr. Powell testified, stocks fell, the dollar strengthened and bond yields rose.
But he emphasized that he planned to continue the policies of his predecessor, Janet L. Yellen, who managed to gradually raise interest rates during her four-year term while still encouraging broad economic growth. Mr. Powell told the House Financial Services Committee that headwinds once holding back the American economy had now turned into tailwinds.
The Fed “will continue to strike a balance between avoiding an overheated economy” and allowing inflation to tick up toward the Federal Reserve’s 2 percent target, Mr. Powell said. “Further gradual increase in the federal funds rate will best promote attainment of both of our objectives,” he added. “My personal outlook for the economy has strengthened since December,” Mr. Powell said.
Mr. Powell, a member of the Fed’s board of governors who was sworn in as chairman earlier this month, faces two days of testimony before the House and Senate, his first public appearance in his new role. Yet he struck a careful tone. Inflation has remained sluggish for nearly a decade, and Mr. 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.
His testimony comes at a critical moment in the economy’s trajectory, as global economies are strengthening and as the Trump administration’s $1.5 trillion tax cuts begin adding economic fuel to the United States. Most Fed officials forecast in December that the Fed would raise rates at least three times in 2018, as it did last year. Mr. 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 are eagerly awaiting signs of how the Fed, under Mr. Powell’s leadership, will respond, and whether it will seek to raise interest rates more quickly than expected. In his testimony, Mr. Powell sought to reassure the markets that, at least for now, he believes the Fed’s current path is the right one. 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.
The Fed has forecast three rate increases in 2018. But some investors believe the central bank could lift its rate four times this year, especially if the Trump administration’s tax cuts, which took effect in January, provide a larger-than-expected boost to the economy and inflation. Some Wall Street analysts said that Mr. Powell’s testimony increased the chances that the Fed would continue with quarterly rate hikes in the second half of the year.
At the beginning of February, data showing wage increases a potential result of inflation triggered a sharp sell-off in stock markets. Major markets have recovered most of those losses in the last few weeks and are trending again toward all-time highs. “We are naturally more confident in our standing call for four hikes this year and another four next year,” said Michael Feroli, the chief United States economist at JPMorgan Chase.
In his remarks, Mr. Powell downplayed concerns of market volatility, saying that financial conditions have become a little tighter, but not so tight as to weigh heavily on growth. And he continued to indicate that he sees the stronger economic news as a reason to carry out the plans for gradual rate hikes, rather than as a reason to start raising rates more quickly. Most Fed officials predicted in December the Fed would raise rates three times in 2018, as it did last year. 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.
Lawmakers grilled Mr. Powell on financial regulation, the rollback of the Fed’s balance sheet, the effect of Trump administration tax cuts, and racial discrimination in mortgage lending. 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.
In his responses, Mr. Powell suggested that he and other central bankers could be re-examining their prediction of three more rate hikes this year, given the passage of the Trump tax cuts and strong economic data since they made their last forecast in December. “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,” Mr. Quarles said.
In the interim, the Fed has seen continuing strength in the labor market, data that suggests inflation is moving toward its target, more stimulative fiscal policy, and continued economic strength around the globe, Mr. Powell said. Lawmakers grilled Mr. Powell on Tuesday on many subjects. House Republicans, who pressed for Mr. Trump to put a Republican in charge of the central bank, asked Mr. 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.
“My personal outlook for the economy has strengthened since December,” he said. “I would expect the next two years on the current path to be good years for the economy.” Democrats, nervous about the new leadership, pressed Mr. 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.
He added that the Fed must be alert to both the buildup of financial imbalances and inflation, but that neither risk appeared high at the moment. Both sides sought Mr. Powell’s affirmation for their views about the economic effect of the $1.5 trillion tax cut that took effect in January.
“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,” Mr. Powell added. Mr. Powell began his remarks by commending Ms. Yellen on her tenure and calling for continuity with her policies. But the differences between Mr. Powell, a former investment banker, and his predecessor, a labor economist, showed through. Unlike Ms. Yellen, Mr. Powell shied away from questions about economic inequality, and he spoke more freely about financial regulation.
Mr. Powell declined to comment in detail on fiscal policy but said the United States should be careful not to default on its debt, and that any spending should be directed at increasing the productive capacity of the economy. “We really need to get on a sustainable fiscal path, and the time to really be doing that is now,” he said. Mr. 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.
Mr. Powell reaffirmed to House members that the Fed intends to loosen some types of financial regulation. One change would 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,” Mr. Powell said. He also said the Fed plans to reduce regulation of smaller banks.
The Fed will focus on making sure that regulation is less burdensome “without losing any safety and soundness,” Mr. Powell said, emphasizing the need to review regulations for 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.
Mr. Powell has taken the helm of the central bank at a time when the economy is nearing the end of its ninth year of expansion and the Fed has been steadily raising its interest rate back to more normal levels, after cutting them nearly to zero to stimulate lending in the wake of the financial crisis. “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,” Mr. 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. Mr. 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.
Mr. 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 nearly to 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.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.
Investors widely expect the Federal Reserve to raise its benchmark interest rate in March, to a range of 1.5 percent to 1.75 percent, with some expecting another quarter point increase in June.
Although a strong economy and low unemployment typically drive up inflation, it has remained puzzlingly low in recent years. Mr. 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.Although a strong economy and low unemployment typically drive up inflation, it has remained puzzlingly low in recent years. Mr. 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.
Investors are watching carefully for any indication that inflation could lift off faster than they had expected a sign that the Fed might have to raise rates more quickly than it planned and risk choking off economic growth. 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.
Mr. Powell has taken up his post at a time when the Fed’s Board of Governors is short staffed, with just three members rather than seven. He joins Lael Brainard, an Obama administration nominee, and Randal K. Quarles, the Trump administration’s pick for vice chairman for supervision, a position where he oversees banking regulation. Another Trump administration nominee, economist Marvin Goodfriend, appears to be held up by unexpected opposition to his nomination. 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, Mr. Quarles also painted an upbeat picture of the economy, saying he was cautiously optimistic that faster economic growth is in the offing. On Monday, Mr. Quarles was cautiously optimistic that faster economic growth is likely. “There are indications that we have a sustainably stronger economy,” Mr. Quarles said. “It’s a little too early to call that as happening, but there are clear indications that it could be happening.”
“The factors that have been holding back growth need not be permanent and could turn, even fairly rapidly,” Mr. Quarles said in a speech before the National Association for Business Economics. Mr. Powell, a member of the Fed’s board of governors who was sworn in as chairman this month, will testify again on Thursday before the Senate Banking Committee.
He pointed to recent doses of fiscal stimulus, including the tax cut that took effect in January, and stronger global growth as reasons for optimism.
“There are indications that we have a sustainably stronger economy,” Mr. Quarles said. “It’s a little too early to call that as happening but there are clear indications that it could be happening.”