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..
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.
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.
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 their 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.
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 to nearly to zero to stimulate lending in the wake of 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.
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.
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The Fed has forecast three such 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 cut that took effect in January provides a larger-than-expected boost to the economy and inflation.
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.
Fed chairs are required to go before Congress twice a year to discuss the central bank’s operations. During his testimony this week, Mr. Powell is likely to be grilled about his plans for guiding interest rates, paring down the Fed’s balance sheet and relaxing rules for banks.
Mr. Powell, a former investor and member of the Federal Reserve’s board of governors under Ms. Yellen, was sworn on Feb. 5 as the Federal Reserve’s 16th chair, where he is charged with setting the benchmark interest rate that speeds or slows economic activity.
He 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.
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.
“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.
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.
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“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.”
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Article source: https://www.nytimes.com/2018/02/27/business/economy/fed-chair-powell-touts-economy-continuity-in-public-debut.html?partner=rss&emc=rss
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