U.S. monetary policy is trying to give the economy room to grow and move inflation higher without sparking a boom-bust economy, new Fed chairman Jerome Powell said Tuesday. “In gauging the appropriate path for monetary policy over the next few years, the FOMC will continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to two per cent on a sustained basis,” Powell said in prepared remarks released early by the House Financial Service committee.
Powell will answer lawmakers questions starting at 10 a.m. Eastern. After a huge surge on Monday, U.S. stock futures suggested a weaker open for the Dow Jones Industrial Average. In his first testimony since taking over the leadership of the U.S. central bank earlier this month, Powell said he and his colleagues view further gradual increases in the federal funds rate as the appropriate policy stance. U.S. economic growth was strong in 2017, but inflation lagged. The core rate of the personal consumption expenditure price index rose at a 1.5 per cent annual rate last year. The Fed targets inflation of 2 per cent.
Fed officials have penciled in three rate hikes this year. But there is an intense debate among Fed officials over whether this is will be too few rate hikes to slow the economy or too many given low inflation. Powell told the House panel that the economy seemed to be strengthening. “While many factors shape the economic outlook, some of the headwinds the U.S. economy faced in previous years have turned into tailwinds,” he said. Fiscal policy is more stimulative and foreign demand for U.S. exports is on a firmer trajectory, he noted. The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment,” Powell said. Taken together, this environment will push inflation up this year and wages should increase at a faster pace as well, he said.
Already, the monthly inflation readings “were a little higher toward the end of the year than in earlier months,” he said. But Powell said the Fed anticipates that inflation will stabilise around the two per cent target. “The FOMC views the near-term risks to the economic outlook as roughly balanced but will continue to monitor inflation developments closely,” he said. In his testimony, Powell included a nod toward the view that stronger growth did not necessarily mean higher inflation. Business investment “stepped up sharply last year, which should support higher productivity growth in time,” he said. Faster productivity growth would give the economy room to grow without generating price pressure.
The new Fed chairman said the renewed volatility in financial markets this month has not altered the outlook for continued strong growth. “At this point, we do not see these [market] developments as weighing heavily on the outlook for economic activity, the labor market and inflation,” Powell said. Indeed, financial conditions remain accommodative, he said. Marketwatch bulletin
