Fed Staff Research Signals Unease About Ignoring Unemployment Drop

Marcus Newton
August 27, 2018

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.

"If the strong growth in income and jobs continues, further gradual increases in the target range for the federal funds rate will likely be appropriate", Powell said.

"The economy is strong".

That is less than the 25 basis points by which the Fed is expected to raise its benchmark short-term rate in September and again in December.

"We have a mandate by law, and we do the best we can to hit the mandate" of maximizing employment and stabilizing prices, James Bullard, president of the Fed's St. Louis regional bank, said Friday in an interview on CNBC.

"Based on what I see today, I think two more rate hikes could be appropriate" this year, as the Fed aims to move interest rates to a neutral setting of about 2.5 per cent to three per cent, she told Bloomberg TV.

Powell sketched a positive picture of the US economy and said the Fed's incremental approach to raising rates has so far succeeded.

Markets are pricing in two more rate hikes this year, and one next year, less than the three rate hikes the Fed now forecasts for 2019.

The chairman said bringing interest rates back toward levels the the Fed sees as neutral is the safest approach to managing an economy that has raised questions about the central bank's diagnostic tools for shaping monetary policy.

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Fed officials have debated over the pace at which they should normalize interest rates after slashing them to near-zero levels during the 2008 crisis.

Part of Powell's rationale for raising rates is that with unemployment at 3.9 percent, inflation will not stay low forever, so rates need to rise somewhat.

Speaking just days after President Donald Trump criticized the USA central bank's rate hikes, Powell used an annual research symposium here to "explain today why my colleagues and I believe that this gradual process.remains appropriate".

Questioning Fed actions is normally off limits for U.S. politicians, since it could raise fears central bankers would feel political pressure and fail to act to head off rising inflation. Brett Ryan at Deutsche Bank wrote Thursday before Powell's speech that, "Powell's discussion will likely focus on longer-term issues for monetary policy, much as Wednesday's FOMC minutes did".

The Fed's overnight lending rate is now in a range of 1.75 per cent to 2.00 per cent.

Federal Reserve Chairman Jerome Powell testifies before a House Financial Services Committee hearing on the "Semiannual Monetary Policy Report to Congress", at the Rayburn House Office Building in Washington, U.S., July 18, 2018.

European stocks look set to open largely unchanged on Friday as trade talks between the USA and China ended without progress, raising concerns that a prolonged trade spat could hurt global growth.

"Over the course of a long recovery, the US economy has strengthened substantially", Powell said. Trump also criticized Powell - who was selected by the president to replace Janet Yellen as Fed chair - saying he was "not thrilled" with him.

Other reports by MaliBehiribAe

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