The US Federal Reserve is aiming to prolong economic expansion, but must balance the risk of raising interest rates too much or not enough, Fed Chairman Jerome Powell said on Wednesday.
Amid increasing concerns in financial markets that the Fed will have to become more aggressive to head off inflation, Powell likened the job to walking in a dark room full of furniture.
In a discussion about the economy with Dallas Federal Reserve Bank President Robert Kaplan, Powell said that the central bank is trying to steer between two common errors.
Photo: Reuters
Holding the benchmark lending rate too low for too long could allow inflation to gain a foothold, he said.
However, the “other mistake — and we had plenty of advice to do this — is to raise rates too soon, and prematurely terminate an expansion. We haven’t done that,” Powell said.
However, “we’re at a point now where we have to take both of those risks very seriously, and that’s why we’ve been raising rates quite gradually,” he said.
Economists expect the fourth rate increase of the year next month, but with a recent report showing that wages are beginning to rise, they are watching for indications about the likely pace of moves next year.
The Fed has repeatedly said it is likely to continue to raise rates gradually, with inflation holding at about its 2 percent target, despite very low unemployment and continued job gains.
However, Powell said that officials have not made the decision yet and would watch incoming data.
Likening the policymaking to “walking through a room full of furniture and the lights go off,” Powell asked: “What do you do? You slow down, you stop probably and feel your way. It’s not different with policy.”
He also said that the global economic outlook is slightly less optimistic this year.
There have been “growing signs of bit of a slowdown, and it is concerning,” he said.
Asked about the effect that US President Donald Trump’s trade policies have had on the economy, Powell said that while officials hear complaints from businesses, the effect of higher tariffs have not yet showed up in lower growth or higher inflation.
“We’re very pleased about state of the economy right now,” Powell said.
“If you look down the road you see challenges ahead” and “we have to be thinking about how much further to raise rates and the pace at which we will raise rates,” he said.
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