Thu, Mar 01, 2018 - Page 10 News List

Powell optimism rattles markets

BULLISH:The Federal Reserve chairman did not express worries that the economy was overheating, stressing instead a number of developments showing economic strength

AP, WASHINGTON

New US Federal Reserve Chairman Jerome Powell on Tuesday delivered a message that was not quite what Wall Street had expected: The US economy is doing well, maybe even better than he thought late last year.

Powell emphasized in his first congressional testimony that the central bank plans to raise interest rates gradually.

Nonetheless, his growing optimism about the economy rattled investors.

Treasury yields climbed and shares fell amid fresh speculation that the Fed would accelerate the pace of increases in its benchmark policy rate this year.

The Dow Jones Industrial Average closed down 299 points.

The Fed raised interest rates three times last year and had forecast in December last year that it would raise rates another three times this year.

However, many private economists said they now expect the Fed to boost interest rates four times this year rather than three.

“My personal outlook for the economy has strengthened since December [last year],” Powell said when asked whether the Fed might boost its forecast for interest rate hikes from three to four when it updates its outlook this month.

Powell would not say whether the Fed’s projection for rate increases would change, but he noted a number of ways that the economic outlook has improved since December, including stronger data on growth and inflation, the passage of a US$1.5 trillion tax cut in late December last year and an increase in government spending in a January budget deal.

Powell said that he would not speculate on whether the number of increases would be boosted since any change would depend on the individual forecasts of each of the 15 members of the Fed’s policy committee, but private economists said they saw Powell’s comments as a strong signal that the Fed would be raising its rate forecast at its next meeting later this month.

Powell’s comments came as he delivered the central bank’s semi-annual monetary report to the US House of Representatives Financial Committee.

He is due to appear before the US Senate Banking Committee today.

Even with three rate increases last year, the Fed’s policy rate remains at a historically low 1.25 percent to 1.50 percent, but various market rates, including home mortgage rates, have begun rising in anticipation of further Fed rate increases.

In his comments, Powell did not express worries that the economy was starting to overheat, stressing instead a number of developments showing economic strength.

“The robust job market should continue to support growth in household incomes and consumer spending,” Powell said.

Some economists have raised concerns that moves by the administration of US President Donald Trump and the US Congress to boost economic growth through tax cuts and spending increases could raise the risks of overheating and inflation, but Powell said that the government’s fiscal policy was now “more stimulative,” which he said would help to boost chronically low inflation.

He said that the Fed expected inflation to move up this year and then stabilize at about the Fed’s 2 percent target.

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