US Federal Reserve Chairman Jerome Powell on Thursday said that the US economy does not appear to be running hot, even as influential New York Fed President William Dudley suggested that a faster pace of interest rate increases could still be in the offing for this year.
“There is no evidence the economy is overheating,” Powell told the US Senate Committee on Banking in his second appearance in the US Congress this week, saying that he expects the Fed to stick with a “gradual” pace of monetary policy tightening.
However, in remarks at an event in Sao Paulo, Brazil, Dudley said that “gradual” could still apply to a scenario in which borrowing costs were raised four times this year, instead of the three moves Fed policymakers projected when they issued their last set of economic projections in December last year.
Photo: Bloomberg
Yet the Fed officials’ comments were overshadowed by US President Donald Trump’s announcement of a plan to raise tariffs on steel and aluminum imports, the sort of move Fed policymakers have warned about since Trump took office last year.
Such action, and the risk of retaliation by trading partners, could cloud the US’ economic outlook and derail the global recovery currently benefiting the US.
In his testimony, Powell described trade as a “net positive,” while conceding that it created some losers in the economy.
“The tariff approach is not the best approach,” Powell said. “The best approach is to deal directly with the people who are affected rather than falling back on tariffs.”
The Fed is expected to increase rates at its policy meeting on March 20 and March 21. Policymakers are also to issue fresh forecasts that indicate whether the core of the rate-setting US Federal Open Market Committee has shifted its view.
In prepared remarks for his testimony this week, Powell pledged to “strike a balance” between avoiding any rapid rise in prices, while keeping the recovery on track in the hope that the tight US job market finally produces significant wage gains.
He also acknowledged, in response to lawmakers’ questions, that the labor market might have room to strengthen further, given uncertainty about the level of “full employment,” a concept generally associated with faster rising wages and prices.
Although the current US unemployment rate of 4.1 percent is “at or near, or even below” many estimates of the full employment rate, “we don’t see any evidence of a decisive move up in wages ... Nothing in that suggests to me that wage inflation is at a point of acceleration,” Powell told the Senate panel.
Risks are “more two-sided” now than early in the recovery, Powell said, adding that “the thing we don’t want to have happen is to get behind the curve.”
However, at this point the Fed could continue “to gradually raise interest rates ... That is the path we have been on and my expectation is that will continue to be the appropriate path,” Powell said.
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