Federal Reserve Chairman Jerome Powell is signalling that he expects the Fed to continue gradually raising interest rates if the U.S. economic expansion remains strong.
Speaking to an annual conference of central bankers in Jackson Hole, Wyoming, the Fed chairman says the central bank recognizes that the path of inflation is so uncertain that it generally needs to strike a balance between being supportive of growth and being restrictive.
Powell says this gradual approach is the wisest policy for the Fed in trying to navigate between the risks of raising rates too fast and thus “needlessly shortening the expansion” and moving too slowly and risking an overheated economy.
His words reinforcing the Fed’s plan to gradually raise rates seemed to have reassured investors. Both the Dow Jones Industrial Index and the wider S&P index spiked upward at 10 a.m. with his opening remarks.
Canada’s central banker, Stephen Poloz, is to address the convention on Saturday.
“My colleagues and I,” the Fed chairman said in his speech, “are carefully monitoring incoming data, and we are setting policy to do what monetary policy can do to support continued growth, a strong labour market, and inflation near two per cent.”
Trump’s complaints about the Fed
Powell made no mention of the recent public criticism from President Donald Trump, who has said he’s unhappy with the Fed’s rate hikes. The president has complained that the Fed’s tightening of credit could threaten the continued strong growth he aims to achieve through the tax cuts enacted late last year, a pullback of regulations and a rewriting of trade deals to better serve the United States.
Many have seen Trump’s complaints about the Fed’s rate hikes as an intrusion on the central bank’s longstanding independence from political influence. On Thursday, two top Fed officials made clear Thursday that Trump’s criticism won’t affect their decisions on whether to continue raising rates.
Powell also made no mention in his speech of what many economists see as the most serious threat to the economy: The trade war that Trump has launched with America’s main trading partners — a conflict that risks depressing U.S. and global economic growth the longer it goes on and that directly targets Canada.
The Fed chairman focused his remarks in part on the difficulty the Fed faces in setting interest-rate policies at a time when the economy seems to be undergoing changes that challenge long-standing beliefs of how low unemployment can fall before it ignites inflation pressures. He said there is also much uncertainty over the “neutral” rate of inflation — the point at which the Fed’s policy rate is neither stimulating economic growth or holding it back.
What is inflation in today’s economy?
The Fed’s economic projections, compiled from estimates of all Fed officials, estimates the current neutral rate at 2.9 per cent. But Powell noted that there’s a wide difference of opinion about it.
After having kept its key policy rate near zero for seven years to help lift the economy out of the Great Recession, the Fed has raised rates seven times, most recently in March and June this year. Most Fed watchers foresee two more hikes this year — next month and then in December.
Powell said the Fed’s incremental approach to raising rates has so far succeeded.
“The economy is strong,” he said. “Inflation is near our two per cent objective and most people who want a job are finding one. We are setting policy to do what monetary policy can do to support continued growth, a strong labour market and inflation near 2 per cent.”