By Greg Robb, MarketWatch
Reuters Enlarge Image
Saying that monetary policy “should be a mystery to no one,” Federal Reserve Chairman Jerome Powell on Tuesday made clear the central bank plans to continue raising interest rate at a pace of once every three months, at least “for now.”
“With a strong job market, inflation close to our objective, and the risks to the outlook roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate,” Powell told the Senate Banking Committee.
Krishna Guha, Fed watcher at Evercore ISI said the phrase “hints...we may not be very far in time and in rate space from the point at which the case for further hikes will be less automatic and the Fed will have to make decisions on a meeting by meeting basis depending on the evolution of the outlook.”
Powell remarks were upbeat. He said the economy was growing at a “solid pace,” and the unemployment rate was expected to fall further. Even the recent pickup in inflation, toward the Fed’s 2% target, was “encouraging,” he said. Powell pointed to “good news” in the decline in the unemployment rates for African Americans and Hispanics. While wage gains was moderate, “it also tells us that the job market is not causing high inflation,” he said.
At the same time, Powell admitted that trade wars and fiscal policy were key areas of uncertainty in the outlook.
“It is difficult to predict the ultimate outcome of current discussions over trade policy as well as the size and timing of the economic effects of the recent changes in fiscal policy,” Powell said.
Senators from both parties pressed Powell on the impact of trade tariffs on the economic outlook. But the Fed chairman refused to get drawn out, sticking with his message that, in general, countries that embrace low tariffs and free trade have better economic outcomes.
Overall, the Fed sees the risks of the economy unexpectedly weakening as “roughly balanced” with the possibility of the economy growing faster than the central bank currently anticipates, the Fed chairman said.
The Fed has already hiked interest rates twice this year to between 1.75%-2% and has penciled in two more quarter-point moves.
At the same time, the Fed has a policy in place to reduce its holdings of Treasurys and mortgage-backed securities. This program “has been running smoothly,” Powell said.
A key challenge for the Fed will be to keep inflation close to the 2% level, he added.
“We will continue to keep a close eye on inflation with the goal of keeping it near 2%,” Powell said.
The Fed chairman said that the healthy economy, with a strong job market and inflation near 2%, could last for several years.
Several factors are contributing to this positive outlook: financial conditions are favorable to growth, the banking system is much stronger than before the crisis and fiscal policy is stimulative, Powell said. In addition, the outlook for the global economy “remains solid despite greater uncertainties in several parts of the world,” he added.
The yield on 10-year Treasury notes /zigman2/quotes/211347051/realtime BX:TMUBMUSD10Y +1.95% was little changed after Powell’s testimony, while stocks rallied after his testimony with the Dow Industrial Average /zigman2/quotes/210598065/realtime DJIA +0.97% closing up 55.23 points to 25,120.
Asked about the flatness of the yield curve, Powell said he used the measure as a signal for where policy rates are relative to their neutral setting.
“This is consistent with our view that Fed officials have little appetite for significantly inverting the yield curve,” said Andrew Hollenhorst, an economist at Citigroup.
The closely watched yield differential between 2-year and 10-year notes is near the narrowest level since 2007. An inverting yield curve is seen by many observers and Fed officials as a accurate predictor of recessions.