The US economic outlook is strong and has grown more robust since December, when Congress approved massive tax cuts, Federal Reserve Chairman Jerome Powell said in his debut congressional appearance Tuesday.
While his prepared testimony stuck to the policy of ‘further gradual increases’ in the benchmark lending rate, Powell told lawmakers all the new factors will be taken into consideration in deciding whether to raise rates three or four times this year.
But the Fed chief said he would not ‘prejudge’ the outcome.
Not so for financial markets, which saw his comments as indicating four rate hikes are likely this year, rather than the three previously expected.
Wall Street stocks tumbled into negative territory immediately after the comments, which also triggered a jump in the 10-year US Treasury yield, a proxy for interest rates.
‘My personal outlook for the economy has strengthened since December,’ Powell said in response to a question about the likely number of possible moves this year.
Fiscal policy is now adding fuel to the economy, he noted, amid job growth and wages showing signs of rising at long last.
But in semi-annual testimony to the House Financial Services Committee, his first as Fed chairman, he noted that members of the central bank’s policy-setting Federal Open Market Committee will be updating their projections on the economy and the course of policy.
‘I wouldn’t want to prejudge that new set of projections, but we’ll be taking into account everything that’s happened since December,’ he said.
Shortly after 1900 GMT, the Dow Jones Industrial Average was at 25,587.47, down 0.5 percent, while the broad-based S&P 500 dropped 0.7 percent to 2,761.04, a slight improvement over the low point of the day. The tech-rich Nasdaq Composite Index shed 0.7 percent to 7,370.15.
‘Stocks ticked higher as Mr Powell began taking questions from the committee, but dropped sharply into the red after he said his economic projections have increased since the December FOMC meeting,’ said
Inflation, wages to rise
Economists already had viewed a rate increase at the late March FOMC meeting as a virtual certainty. That outlook will only be solidified now.
The Fed can at any time change the key interest rate that sets everything from mortgages to car loans, at any time, but in practice in recent years it has only done so at one of the four meetings that includes a press conference by the Fed chief, like the one in March.
Powell was very bullish on the economic outlook, noting that ‘some of the headwinds the US economy faced in previous years have turned into tailwinds.’
In particular, in the wake of the tax cuts Congress passed in December, ‘fiscal policy has become more stimulative,’ while demand for US exports has firmed given the ‘solid economic growth of our trading partners,’ which is helping the manufacturing sector.
However, in his responses, where he faced many questions about the large budget deficits and rising federal debt in the wake of the tax cuts, Powell stressed: ‘We really need to get on sustainable fiscal path. The time to do that is now.’
Powell echoed other Fed officials saying inflation has been held down by temporary factors that are unlikely to be repeated, allowing prices to rise this year closer to the two percent goal, as wage gains also accelerate at long last.
‘In this environment, we anticipate that inflation on a 12-month basis will move up this year,’ reaching the two percent goal in the medium term, he said. ‘Wages should increase at a faster pace as well.’
The central bank’s preferred inflation measure rose only 1.5 percent last year.
Weak productivity
Powell also faced multiple questions about weak wage growth in recent decades, and he told lawmakers that the antidote to that is rising productivity, which is something the Fed cannot influence directly.
‘Productivity is the thing that allows wages to rise,’ he said, and the most important thing the government can do is improve education and training.
‘We want this to be a society where everyone has opportunities.’
He pointed to some good news in the economic data, where ‘upbeat business sentiment’ and strong sales should boost investment, leading in turn to higher productivity.