Powell: Growing economy may affect Fed rate hike forecast

Powell: Growing economy may affect Fed rate hike forecast
© Camille Fine

Federal Reserve Chairman Jerome Powell on Tuesday said increasing economic growth may impact how many times the central bank expects to raise interest rates this year.

Powell said that rising wage growth, business investment and pressures on inflation could push officials toward a quicker path for interest rate increases. He said that Fed officials are currently forming their economic outlooks for the bank's March meeting, but wouldn't assume how they'd change.

"What we’ve seen is incoming data that suggests a strengthening of the economy,” Powell told the House Financial Services Committee on Tuesday.

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“Each of us is going to be taking the developments since the December meeting into account," Powell said. “I don’t want to prejudge that projection.”

Powell promised lawmakers that the Fed will keep a careful eye on inflation as the bank prepares to hike interest rates in a strengthening economy.

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Powell's appearance before the panel comes as Fed observers try to predict how the bank will act on interest rates this year and the direction the bank sees the economy going.

The Fed has forecasted three rates hikes in 2018, the first of which will likely occur next month.

The U.S. is near full employment and the tight labor market is finally starting to drive up wage growth and prices. The Fed is aiming to raise rates quickly enough to prevent the economy from overheating but wants to keep from short-circuiting the financial markets.

“We are all rooting for you, for much is at stake," House Financial Services Committee Chairman Jeb HensarlingThomas (Jeb) Jeb HensarlingLawmakers battle over future of Ex-Im Bank House passes Ex-Im Bank reboot bill opposed by White House, McConnell Has Congress lost the ability or the will to pass a unanimous bipartisan small business bill? MORE (R-Texas) said.

“Now more than ever, the Fed must commit to a credible, orderly and well-communicated normalization plan.”

Powell said the Fed will "continue to strike a balance between avoiding an overheated economy and bringing PCE price inflation to 2 percent on a sustained basis."

Fed officials have largely predicted that inflation will rise as the economy continues to grow and low unemployment pushes wages higher. The central bank also expects the economy to expand at a greater pace due to the $1.5-trillion tax cut passed at the end of 2017.

Powell said that the U.S. is enjoying "solid growth and a strong labor market," and pointed to increases in consumer spending, wage growth, demand for U.S. exports and business investment.

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He said that the labor force participation rate had remained unchanged, an encouraging sign given the mass departure of baby boomers from the workforce.

Lawmakers argued along party lines over whether former President Obama or President TrumpDonald John TrumpRepublicans aim to avoid war with White House over impeachment strategy New York Times editorial board calls for Trump's impeachment Trump rips Michigan Rep. Dingell after Fox News appearance: 'Really pathetic!' MORE were responsible for 2017's solid economic growth that has appeared to continue in 2018.

Democrats said the U.S. economy was still running on Obama-era policies and impacts, while the GOP attributed the growth to its tax bill and deregulatory agenda.

Powell said the economic outlook "remains strong."

"The robust job market should continue to support growth in household incomes and consumer spending, solid economic growth among our trading partners should lead to further gains in U.S. exports, and upbeat business sentiment and strong sales growth will likely continue to boost business investment," Powell said.

Republicans asked Powell to confirm that their tax plan, which dropped the corporate income tax rate from 35 to 21 percent, would boost wages and economic growth. The chairman said that tax cuts should lead to wage growth through a boost to labor productivity from higher business investment but that it's hard to put a number on the impact.

Powell avoided taking a hard position on how the GOP tax plan would impact the debt but warned about the general dangers posed by consistent federal deficits.

Democrats pressed Powell on using his influence to tackle the higher rate of minority versus white unemployment, the gender pay gap, and racial discrimination in lending. Powell repeatedly agreed that those problems should be tackled, but that the Fed didn’t have the tools to do it.

Several Democrats asked Powell to consider raising the target inflation rate and delaying interest rate hikes to boost further economic expansion and wage growth. While the economy is close to full employment, those lawmakers insisted that easier financial conditions would help bring down unemployment among blacks and Hispanics.

Powell insisted that the Fed needed to take a careful approach to moderating inflation.

‘We’ve reached the point where the risks are two-sided now, and we need to keep that in mind,” Powell said. “That’s why we’re raising rates on a gradual path.”

“If we wanted to wages to go up over a long period of time, there needs to be more productivity.”

Updated at 1:58 p.m.