New Fed chief signals continuity

New York Stock Exchange traders watching a TV broadcast of Federal Reserve chairman Jerome Powell testifying before the US House of Representatives' Financial Services Committee on Tuesday.
New York Stock Exchange traders watching a TV broadcast of Federal Reserve chairman Jerome Powell testifying before the US House of Representatives' Financial Services Committee on Tuesday.PHOTO: REUTERS

Powell sticking with plan to gradually raise interest rates

WASHINGTON • Federal Reserve chairman Jerome Powell, in his first public appearance as head of the US central bank, vowed to prevent the economy from overheating while sticking with a plan to gradually raise interest rates.

Testifying before the US House of Representatives' Financial Services Committee, Mr Powell acknowledged the economy had strengthened recently, a remark that prompted investors to increase bets on four rate hikes this year.

The Fed's last round of economic projections in December pointed to three rate increases this year.

Mr Powell's overall tone on Tuesday, however, was one of continuity, as he told lawmakers that the Fed would balance the need to guard against excessive inflation with the benefits of allowing the economy to enjoy the "tailwinds" of tax cuts and strong global growth.

He said the Fed was in a "process of discovering" how low unemployment could fall before inflation took hold.

The US unemployment rate is at a 17-year low of 4.1 per cent.

"The (Federal Open Market Committee or FOMC) will continue to strike a balance between avoiding an overheating economy and bringing... price inflation to 2 per cent on a sustained basis," Mr Powell said.

"Some of the headwinds the US economy faced in previous years have turned into tailwinds," he added, noting recent fiscal policy shifts and a global economic recovery. Still, "inflation remains below our 2 per cent longer-run objective. In the (FOMC's) view, further gradual rate increases in the federal funds rate will best promote attainment of both of our objectives".

The testimony was Mr Powell's first signal as Fed chief that the Trump administration's massive tax overhaul and spending plans will not prompt any dramatic shifts in central bank policy.

"Gradual" has been the operative word used by the Fed since it began raising rates under Mr Powell's predecessor, Dr Janet Yellen, in late 2015. The Fed is expected to push through its first rate hike of 2018 at its next policy meeting this month, when it will also provide fresh economic projections and Mr Powell will hold his first press conference.

Mr Powell's appearance before the House panel on Tuesday was largely devoid of fireworks or friction, a contrast to some recent hearings in which Fed chiefs have been grilled aggressively over the central bank's bond buying to fight the 2007-2009 financial crisis and the resulting massive swelling of its balance sheet.

Much of the questioning amounted to a review of where the Fed stands on financial regulation.

Mr Powell, who was nominated by Republican President Donald Trump and later confirmed by the Republican-controlled US Senate, said he felt the Fed's current tools for managing interest rates, a steady decline of its balance sheet, and its 2 per cent inflation target were working fine.

REUTERS

A version of this article appeared in the print edition of The Straits Times on March 01, 2018, with the headline 'New Fed chief signals continuity'. Print Edition | Subscribe